Going public?

Michael Alan Hamlin

Posted on September 24, 2008

Maybe not. But there are other opportunities for Philippine startups

On Monday, September 15, Lehman Brothers (You have to wonder how long that link will be live.) announced that it would enter bankruptcy with the intent to liquate its assets rather than seek protection from creditors, having failed to complete merger negotiations with Barclays (which later agreed to buy the Lehman investment unit). Troubled Merrill Lynch was acquired by Bank of America in a $50 billion transaction. Insurance giant AIG said it needed US$40 billion to fund its obligations after credit downgrades, and on Tuesday the U.S. government seized control of the company and extended a US$85 billion taxpayer-funded lifeline.

The day following the AIG takeover was quickly dubbed Black Wednesday as investors rushed to unwind investment positions. According to AMG Data Services (Requires subscription.), money market investors redeemed US$144.5 billion from Monday through Black Wednesday, compared to $7.1 billion a week earlier. With world markets plummeting, U.S. Treasury Secretary Henry Paulson realized that the global financial system was unraveling, leaving corporations unable to fund their daily operations.

This spectacularly frightening turn of events provided the backdrop for a briefing organized by Outsource2Philippines (O2P) and the Business Processing Association of the Philippines (BPA/P) entitled, “On the Road to Going Public: A Forum for Corporate Executives Considering Equity Funding.” The idea to conduct a briefing primarily for BPA/P members was originally proposed by the Philippine Stock Exchange (PSE) several months ago. PSE executives say the offshoring and outsourcing (O&O) sector is a priority market for the exchange, which supported last week’s briefing. (Disclosure: I am an O2P director and BPA/P is a client of my firm, and my firm organized the Forum.)

Many of the O&O companies operating in the Philippines are public firms. They consist of global corporations with diversified operations, U.S. headquartered firms with operations substantially in the Philippines and elsewhere other than the U.S., and homegrown firms. Despite the dire financial news leading up to the briefing, executives in public O&O firms speaking during the meeting and other resource speakers provided valuable insights into alternatives for funding business development initiatives.

PeopleSupport president Rainerio Borja told delegates participating in the briefing that when his company went public in late 2004 raising approximately US$100 million, it faced a unique problem: what to do with the money. “Our business was so good that that we didn’t need these funds for expansion,” Borja said. “Cash flow from operations was more than adequate.”

Borja made his comments in reaction to earlier statements by software entrepreneur Joey Gurango, who said that O&O software startups in the Philippines often don’t require large amounts of development capital. In Gurango’s case, his company, Gurango Software, has acquired global operations through a series of private placements and mergers which preserved the Gurango Software brand. (Disclosure: My firm is a minor shareholder in Gurango Software.)

Gurango Software had intended to raise funds in the vicinity of US$6.5 million in an initial public offering (IPO) in the first half of this year on the PSE. The funds were to be used to finance the company’s continued expansion internationally. That plan, like those of a number of other firms that had planned IPOs on the PSE this year went south when market conditions deteriorated as the subprime mortgage debacle began to scare away international investors who feared a broader downturn.

So instead of an IPO, Gurango Software is undertaking another private placement. According to Gurango, the company is eyeing a placement of just US$5 million as a result of growth in revenues and cash flows in the markets in which it operates. (Incidentally, Gurango told me after the briefing that despite rising inflation and the bleak economic outlook outside the Philippine O&O industry, the Philippine market is growing strongly for his company. “I’m surprised how robust our Philippine pipeline is,” he said. The fact that companies continue to invest in technology here suggests that they are either optimistic about the future or worried about more efficient competitors or both.)

ATR KimEng Capital Partners, Inc. managing director Marcelito R. Ordoñez responded to Borja and Gurango noting that his investment bank is developing new products that are aligned with the capital requirements of the O&O industry. Luz Lorenzo, ATR KimEng regional economist, noted that both debt and equity funding opportunities are available from as low as US$5 million, an amount that would not interest investment banks and funds in the U.S. – even after last week.

If private placements can satisfy the capital requirements of O&O startups, are there advantages to going public? Both Borja and Gurango say there are. They said emphatically that employees are motivated by stock options not just for the potential financial returns, but because options convey a sense of ownership and opportunity. IPOs also offer the opportunity for investors to realize a return on their early financial support.

After the briefing Thursday in the Philippines, the U.S. government announced that it would invest another US$700 billion in taxpayer money buying distressed assets from U.S. financial institutions. And global markets rallied in response. But it will take time as well as U.S. taxpayer money to surmount this crisis. In the meantime, the briefing demonstrated that there are still plenty of opportunities for Philippine startups to find the funding they need to grow.

(Presentations delivered at the Forum can be downloaded here.)

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