About nine months ago, Heartlab president and CEO Robert Petrocelli envisioned having a new stock symbol next to the company’s name by the second quarter of this year.
The Westerly developer of cardiac-imaging software had been working with two investment firms last summer, ramping up for what Petrocelli expected would be an initial public offering as early as April or May.
Now those plans have been put on hold, thanks mostly to a clouding over of the public equity markets after the Sept. 11 terrorist attacks, which helped nudge the U.S. economy into a short-lived recession. Coupled with the hangover from Enron’s accounting scandal and subsequent bankruptcy, Petrocelli said the IPO market – at least for the next 12 months or so – isn’t the place to be.
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"Pre-Sept. 11, pre-Enron, it was a difficult but attractive environment in the public markets," Petrocelli said. "Now it’s just extremely unattractive, and I think the opportunities on the private side are a lot greater."
Heartlab would rather focus on forging strategic alliances and potentially acquiring smaller companies that could add value to Heartlab’s technology platform, he said.
Several factors have converged to make the public equity market an uninviting place – chief among them is a much tougher stance on the part of IPO underwriters, who are toeing a firmer line when it comes to pegging a company’s valuations.
The inherent risks in such discussions are high: If a company starts out with a low valuation, it can be difficult to regain ground, Petrocelli said.
"If you come out with a discounted valuation, you’re really facing an uphill struggle to build value in the public company," Petrocelli said.
Another factor weighing on Heartlab’s IPO plans is the Enron fallout, which has subjected every company’s books to much sharper scrutiny by Wall Street and investors – especially firms seeking their first influx of public money.
Petrocelli said Heartlab has the "infrastructure" to handle the reporting requirements that would come as a public entity: an "outstanding" chief financial officer, along with a strong communications department and sound auditing.
But for Heartlab, the accounting scrutiny could be even more intense because it uses Andersen as its auditor. Petrocelli said, despite the solid work done for Heartlab by Andersen’s Boston office, the public markets likely would spend extra time combing over the numbers of any Andersen-audited company looking to float an IPO.
"It’s really unfortunate when a quality practice like Andersen’s gets trashed because of the actions of a few," Petrocelli said. "But I don’t know if you’ll see many companies going public with Andersen’s opinion anytime soon."
The new focus on accounting and the heated debates over valuations would only add to the time-consuming process of filing for an IPO. Petrocelli said one colleague at a medical-device firm in another state has seen his company’s IPO delayed more than a month while the executive remains "out on this extremely complex road show" that prevents him from running his business.
And then there’s the reporting burden that comes once the company is publicly traded. Petrocelli said that having to answer to analysts and investors on a quarterly basis can divert a company’s attention from its long-term focus.
For example, Heartlab’s business is reliant on large capital investments by its customers – primarily hospitals – which results in ebbs and flows in the company’s deliverables. "The public markets hate that, because it’s not predictable," Petrocelli said.
Instead of spending energy on appeasing Wall Street’s expectations, Heartlab has charted a strategic course that involves growth through private channels. He said acquisitions of smaller private firms are a strong possibility, and it will look to create alliances with medical technology companies in Europe.
