Mark Evans
Financial Post

Amid all the hype surrounding the emergence of Internet telephony, there has been a missing element: a flurry of initial public offerings.
This is an interesting situation given IPOs were a dime a dozen during the dot-com boom when many companies issued equity based on a sexy idea or soon after signing their first customer.
The most blatant example of a company still sitting on the sidelines is Vonage Holdings Corp., which is raising another US$200-million of private equity rather than do an IPO.
Perhaps the simplest explanation for the dearth of IPOs is the unfriendly capital markets landscape. The handful of publicly-traded Internet telephony companies have done poorly over the past three months. Deltathree Inc. has tumbled 32.4%, 8x8 Inc. has dropped 51% while Net2Phone Inc. is down 32.2%.
For most companies with IPO aspirations, it has become a waiting game until capital market conditions improve. This means hunkering down to improve the business and, if possible, raise private equity. Another option is attracting a buyer looking for leading-edge technology. Cisco Systems Inc. and Juniper Networks Corp., for example, have made several strategic acquisitions recently to boost their Internet equipment portfolio.
David McCarthy, a managing director with BCE Capital, said there will be investor appetite for Internet telephony companies but they need to have a couple of years of consistent revenue and customer growth, and several quarters of profits.
"The market is still reeling from the bubble we went through a few years ago. I don't think we are at the stage where the floodgates will open to go public. Google went public, and was successful but it wasn't followed by a thousand dot-coms. The public market is open selectively for some things that investors want: stability and profitability."
In many respects, the capital markets criteria for high-tech companies could be returning to the days before Netscape Communications Inc. went public in 1996. Before Netscape splashed onto the scene, the typical high-tech company doing an IPO had been in business for several years, it had more than $20-million in revenue, consistent profits and a healthy customer portfolio.
These fundamentals, however, were ignored during the dot-com boom when customers, revenue and sales were cast aside for sexier metrics such as unique visitors, clicks-per-visit and registered users.
Today, the wildcard in the Internet telephony IPO market could be Edison, N.J.-based Vonage, which has more than 600,000 residential Internet telephony customers. If it does an IPO, it could encourage other companies to capitalize on the excitement.
There is a growing belief, however, the IPO market could gain momentum in the second half of the year as Internet applications such as telephony and video-conferencing become more mainstream among residential and business users.
Jeff Pulver, who organizes Internet telephony conferences, said the companies that have survived during the telecom industry's tough times should be able to reap the benefits.
"With positive cash flow and profits, I think there is momentum that will provide strong businesses access to public markets," he said. "We will see acceleration of M&A in the U.S. and, in some cases, it will be done to stop people from going public to close down potential competitors. In other cases, good strategic acquisitions can happen."
Mr. Pulver said the market will become more receptive to IPOs as the industry migrates from the hype of the technology to the reality of the technology.
Until this happens, companies need to be patient.
A good example is Mitel Networks Corp., which makes Internet telephony equipment. Steve Spooner, Mitel's chief financial officer, said the Kanata, Ont.-based company could have done an IPO but decided to raise US$55-million recently through a convertible debt offering to complete its transition to IP from older telecom technology.
"We would have taken Mitel public but we are investing very heavily, and it is easier to be in investment mode as a private company," he said. "When we have an operating model closer to public company comparables -- assuming a welcoming market -- that is the time in our minds to consider going to the public markets."
© National Post 2005