How to Spin Off a Winning IPO
from Winter 1998
by Colin Leinster
When Coulter Corp., a Miami maker of medical diagnostic equipment, decided to spin off one of its biotech business units a few years back, it did several things right—notably, putting together a board of directors and management team long before actually taking the new company public, something it did in January 1997. In the months since that IPO, the share price of Coulter Pharmaceutical, which is developing various cancer treatments and therapies, has doubled. The Nasdaq composite rose only 23% over the same period.
The new company is beating other odds, too. Average share prices for IPOs fall 2% by the end of their first year, and 5% by the second, according to a survey by Ernst & Young Consulting. Those averages are particularly abject given the extent to which they are pulled in the opposite direction by the stratospheric performance of Yahoo! and other superstars from Silicon Valley, a neighborhood that Coulter Pharmaceutical now calls home.
More often than not, new companies shoot themselves in the foot. Late earnings reports, disappointing products, botched investor relations opportunities, among other reasons, kill early enthusiasm for the stock. Analysts who cover the stock move on. Investors move out. Share prices sputter and fade. Worst, second chances are rare on unforgiving Wall Street.
So what sets winners like Coulter apart, and what can directors who are eyeing spinoffs of their own do to improve the odds of success?
To answer questions such as these, Ernst & Young and researchers from Harvard Business School surveyed executives from more than 500 IPOs, some of them winners, some of them losers. An early surprise, once the replies started to come in, was that most of these outfits, far from being high-tech startups helmed by computer whizzes with peach fuzz on their cheeks, were private companies with a median age of 15 years or more under their belts, or spinoffs by mature public corporations.
The consulting firm is quick to say that it discovered no magic bullet for success. Research did show, however, that the most successful IPOs shared three common characteristics:
- They learned to behave like a public company before they became one, installing the financial systems, for example, that enabled them to report earnings in a timely manner and avoid what E&Y partner Michael Hildreth calls “the hiccups that scare away Wall Street.”
- They put these systems to work months or years before going public, and thus were able to correct potential problems before they could affect the companies’ performance.
- By the time they went public, they had a competitive edge, financially and otherwise, over other companies in the same business.
On top of that, according to the report, “the successful companies saw the public offering as part of a process, not an event in itself.”
All these ducks were in line by the time Coulter did its spinoff. Cutting the cancer treatment business loose had long been a twinkle in the eye of those who felt the operation was something of an orphan within the company. Indeed, many spinoffs do require an in-house champion. By February 1995, the idea had become policy. Venture capitalists had bought into the new company, and Coulter began to assemble a board of directors. For a chairman, it turned to Arnold Oronsky, now 57, a general partner at InterWest Partners, the main investors, and an experienced executive in a variety of biotech companies. Other members of that inaugural board included Robert Momsen, also a general partner at InterWest and a founder of Life Instruments, a medical diagnostic imaging company, and Sue Van, a former CFO at Coulter’s parent company (which merged in October 1997 with Beckman Instruments) and trustee of the Wallace H. Coulter Trust.
The search for a CEO ended in July 1996 with the appointment of Michael F. Bigham, now 41 and, at the time, CFO and executive vice president of operations at Gilead Sciences, a widely respected biotech company that he had helped take public. Before that, Bigham had been co-head of healthcare investment banking at Hambrecht & Quist. In other words, he knew biotech and he knew how to put on a roadshow for Wall Street. Bigham moved fast to assemble his team. His hires included William G. Harris, director of finance at Gilead, who signed on as CFO.
Going public was still a year away, but Coulter Pharmaceutical began to behave as if it were a public company. Bigham, tapping his Wall Street and Silicon Valley investor contacts, beat the drums constantly. “It takes time toeducate the investment community about a new product,” he says. Behind the scenes, scientists concentrated on two distinct technologies: therapeutic antibodies and targeted oncologics. These treatments would allow for a specific attack on cancerous cells while avoiding the healthy ones. One drug, Bexxar, has been shown to be effective in treating some types of non-Hodgkin’s lymphoma and could be on the market in late 1999.
Bigham knew that a great product would not be enough. “We had to sell it,” he says, “and within 48 hours of getting this job, I started to think about our marketing challenge.” Shortly after the IPO, he filled the key job of vice president for sales and marketing with Dwayne M. Elwood, luring him away from a Johnson & Johnson division where Elwood was vice president of new product development.
“Many companies that go public do so in the hope that they’ll be like their peers,” says E&Y’s Hildreth. “Mike Bigham was never comfortable with that. He knew that ‘like your peers’ means being average—and average means you underperform. He wanted to be the best.”
Bigham admits being best is his objective. As a result, one of his first actions as CEO, long before the IPO, was to restructure the young company by cutting away some of the employees. “My experience is that the quality of the first 50 or 75 people at a company determines whether you’re going to be mediocre or an ‘A.’ I did want an ‘A’—it’s a religion with me. The people hired when the company is starting affect what type of company it will be when it grows up.”
Bigham counts himself fortunate that so far he hasn’t made any serious errors—”not that that will always be true,” he says. But that still puts him way ahead of the game. The E&Y report concluded that “one of the most astonishing” of its findings “was that almost half the executives considered themselves, in retrospect, ill-prepared for the IPO.” That lack of preparedness tracked with how well a company fared after going public. According to the report, 62% of the unsuccessful companies felt they were ill-prepared, compared with 34% of the successful ones.
It’s common knowledge that Wall Street’s stumbling bull almost brought IPOs to a halt, even postponing such high-profile entries as Goldman Sachs. To Hildreth, this hiatus contains a silver lining. “It gives companies time to go over everything one more time,” he says. In other words, directors planning a spinoff should grab the opportunity offered by a stalled market to make sure they line up all their ducks just right.
