Demand weak, Lulu puts off IPO

Bob Young has deferred his IPO dreams.

The founder and CEO of Raleigh-based online book publisher Lulu postponed plans for an initial public offering Thursday because the company and its bankers ran into weak demand among investors.

Young and Lulu's backers had wanted to go public on the Toronto Stock Exchange this week but weren't able to get the price they wanted.

The company on Wednesday reduced the proposed price to about $7 per share, from $8 to $9.50 each. But that still wasn't enough to lure prospective investors worried about Lulu's financial future and the shaky stock market.

After debating the situation overnight, Young decided to pull the plug, for now.

"It is a minor disappointment, but only a minor one because we've only delayed it," Young said. "We were in a fortunate position to turn down the offer we received from the capital markets because it wasn't generous enough."

Young said Thursday that he was writing "thank you" notes to potential investors that he met with in recent weeks to promote Lulu's business. "I'm also telling them we'll come back when we have a stronger story."

Lulu is one of this region's small but fast-growing technology companies that continue to hire and drive the Triangle's economy. Several have filed IPO plans or are considering such a step.

An IPO would have given Lulu more money to pay for expansion and attracted more attention to this area as a tech hub. Lulu initially had hoped to raise as much as $70 million, according to published reports.

It's delicate for a company's executives and underwriters to determine a valuation that attracts investors, but doesn't shortchange original owners, said David Menlow, president of IPO Financial Network, a New Jersey research firm.

And the perceived value can change dramatically depending on the "fickleness of the market" and a "host of ancillary issues," he added.

That said, Lulu could have a tough time when it decides to revive its IPO plans, Menlow said.

"It's very unsettling to have a company come to market and not make it," he added. "You only get one chance to make a first impression."

Still, investors' memories tend to be short regarding opportunities to make money, said John E. Fitzgibbon Jr., publisher of IPOScoop.com. "If and when [Lulu] comes back, they will have new financials and a new outlook."

Lulu's more than 100 employees, mostly in Raleigh, will continue to work on expanding the company and try to revive IPO plans within 12 months, Young said. But it could be even sooner if the stock market cooperates.

"We're in good shape, and we have a very healthy growth rate going this year," he said. "If we have a couple of quarters where we can show that to investors," it will help improve demand for Lulu shares.

It took about three months of intense work among Lulu employees, lawyers and investment bankers to get the IPO organized. It will be easier when the company revives its plan, Young said. "The next time we do this, it will take about 10 days."

The Canadian connection

Lulu first filed plans for a Canadian IPO in March, partly because going public there is cheaper than in the United States. Investors in this country would have been allowed to buy the shares.

Young, who founded the company in 2002, grew up in Canada and has strong ties among investors there. Young, who co-founded Red Hat, was CEO of the Raleigh software company when it went public.

Young said Lulu does not need to cut costs after pulling its IPO.

Lulu continued to lose money last year, reporting a net loss of $1.9 million on revenue of $31.6 million. But the company made money in the final quarter of 2009, earning $140,000 and reversing a loss of $4.6 million a year earlier. Young declined to disclose more recent results, but added, "We're strongly cash-flow positive."

And the company continues to add content and services. On Wednesday, Lulu announced that it has added more than 700,000 traditionally published books to its Web site, including best-sellers such as "The Big Short" by Michael Lewis and "Going Rogue" by Sarah Palin.

The company also recently signed a distribution deal to make some of its book titles available on Apple's new iPad.

Most of Lulu's revenue comes from helping authors self-publish more than 15,000 books a month.