Gaining Momentum: One homegrown company has gone public and two more are expected to this year

May 28, 2021

Sacramento Business Journal

Downey Brand senior associate James Wigginton was interviewed for this Sacramento Business Journal article regarding the three recent IPO filings in the Sacramento-region. James discusses Sacramento public company trends and what he thinks about the recent rise in IPO filings.

Read the full article below, or subscribers can view the article on the Sacramento Business Journal’s website.

By Mark Anderson, Staff Writer, Sacramento Business Journal

One homegrown company has gone public and two more are expected to this year. Impressive when you consider the area had only two IPOs in the previous decade.

Sacramento has seen three homegrown companies approach the initial public offering market this year, which is pretty impressive when you consider the area has had only two IPOs in the previous decade.

And in that decade the region lost a handful of locally based public companies that were bought out, moved their headquarters elsewhere or went bankrupt.

Sacramento has never been home to a lot of public companies, and they’ve been declining over the years.

But this year has brought national and global investor interest back to the capital region with a mix of companies, including a chemical company, a traditional regional bank and a global software company.

Sacramento is sharing in the momentum of increased interest in new public companies that saw the number of IPOs double from 2019 to 2020 and then match all of 2020 in the first quarter this year.

Rancho Cordova-based banking company Five Star Bancorp, West Sacramento-based zero-carbon plastics maker Origin Materials and Folsom-based education software company PowerSchool all announced that they would move to publicly traded markets this year.

“We want to feel that these things are connected somehow, but these three companies going public could not be more different,” said James Wigginton, a senior associate in corporate law with law firm Downey Brand LLP’s Sacramento office.

Five Star Bank has years of profitable operations behind it. Origin is pre-revenue, and is using its IPO proceeds to build manufacturing capabilities. While PowerSchool has healthy revenue, it’s going public partly to repay financing for a recent acquisition and also to cash out a pair of private equity firms and long-term investors.

What the companies do have in common is that they have chosen to go public during a time when momentum has been accelerating for IPOs and for mergers with blank-check companies.

‘It brings credibility’

Nationally, there were 407 IPOs in 2020, compared to 195 in 2019. Through the first quarter of this year alone, there have been 419 IPOs, according to Dealogic. Many of those are special purpose acquisition companies, or SPACs, which are sometimes referred to as blank-check companies. They have no specific business plans or operations other than to pursue mergers or acquisitions to take private companies into public markets.

Five Star went public in an offering that raised $107 million this month. That was a traditional IPO.

Origin Materials is going public in a SPAC merger valued at $991 million with New York-based blank-check company Artius Acquisition Inc. Following the merger, Origin could instantly become the region’s largest publicly traded company by market capitalization.

PowerSchool has chosen a traditional IPO with investment bank underwriters led by Goldman Sachs & Co. LLC, Barclays, Credit Suisse and UBS Investment Bank.

The surge of locally driven IPOs shows that “our economy is getting more advanced and robust,” said Michelle Willard, head of marketing for the Greater Sacramento Economic Council.

Going public raises money for the companies to continue to grow, but it also pays money back to investors, some local, who have backed the companies with speculative and non-tradable investments for years, said Sanjay Varshney, a professor of business at California State University Sacramento and chief economist of the Sacramento Business Review.

Publicly traded companies have some advantages over private companies in that they have myriad ways to raise capital through the markets.

Being publicly traded also gives the companies more clout because their financial reports are public and audited, Varshney said. “It brings credibility.”

Moreover, being publicly traded can help companies acquire other companies as they can use their own stock as a currency in the transaction.

Two of Sacramento’s publicly traded companies, Roseville solar installer Sunworks Inc. and Davis ag-tech company Arcadia Biosciences Inc., have used their stock this year to buy other companies.

“It is remarkable how few public companies are left here. I didn’t realize it had gotten so sparse. There has been a lot of churn,” said Matt Plavan, CEO of Arcadia.

With the three new IPOs, he said, “at least we’ve put some points on the board.”

Arcadia recently completed a deal to acquire a portfolio of wellness product assets from San Jose-based The Parent Co., a vertically integrated cannabis company. For the transaction, Arcadia used a mix of $4 million in cash and 827,400 shares of its common stock, worth another $2.16 million.

“It was a good way to split it. Both our cash and our shares are dear to us, but it was a good split,” Plavan said.

Arcadia is also granting a total of 248,000 shares of common stock as inducement stock options to 14 new Arcadia employees who had been The Parent Co. employees, Plavan said.

That highlights another use of public stock. In competitive industries, being public can help companies attract and retain skilled talent who can be awarded stock or stock options as part of their compensation.

The decline of publicly traded companies

In the last decade, Sacramento has lost five public companies, including newspaper publisher The McClatchy Co., which went bankrupt and was then was taken private. There’s also rocket manufacturer Aerojet Rocketdyne Holdings Inc., which moved its headquarters to El Segundo and most of its manufacturing operations to the Southeastern U.S.

The decline of publicly traded companies isn’t just a Sacramento phenomenon, said Varshney. The number of public companies nationwide has declined by half since the 1990s.

The Wilshire 5000 Total Market Index, a stock market index of publicly traded American corporations, peaked with 7,500 companies listed in 1998. It now has approximately 3,500 companies listed, according to Wilshire Advisors LLC in Santa Monica.

While the number of U.S. publicly traded companies on major exchanges has declined by more than half since 1998, the market capitalization value of the companies represented on the index has more than tripled over the same period.

Sacramento historically has not been a fertile market for IPOs, Varshney said, primarily because it is a government town and many large companies based here are risk averse. The region’s most successful companies are closely held and have no interest in going public, in part because of the regulatory burdens and disclosure requirements.

Also, many of the region’s biggest private employers are government, nonprofits or tribal casinos that can’t legally go public.

“What is Sacramento’s competitive advantage? We’re not Silicon Valley. What do we have that no one else does? It’s life sciences and ag companies. That makes Origin Materials compelling because of its connection with climate change technology,” said Wigginton with Downey Brand.

Timeline

Tracking the most recent local IPOs and lost public companies since 2016:

2006

• Alto Ingredients Inc. (Nasdaq: ALTO) goes public as Pacific Ethanol Inc.

2012

• Waste Connections Inc. (NYSE: WCN) moved headquarters to Woodlands, Texas, in 2012.
• SureWest Communications of Roseville was bought by Illinois-based Consolidated Communications Holdings Inc. (NASDAQ: CNSL) in 2012.

2013

• Marrone Bio Innovations Inc. (Nasdaq: MBII) 2013, which was the first major local IPO in a decade.

2015

• Arcadia Biosciences Inc. (Nasdaq: RKDA) goes public

2016

• Aerojet Rocketdyne Holdings Inc. (NYSE: AJRD) moved its headquarters from Rancho Cordova to El Segundo in 2016 to be closer to customers.

2020

• The McClatchy Co. (NYSE: MNI) filed for bankruptcy in 2020 and then was taken private by a private equity investor.

2021

• Five Star Bancorp Inc. (Nasdaq: FSBC) goes public
• American River Bankcorp (Nasdaq: AMRB) currently being sold to Bank of Marin.
• PowerSchool planning to go public sometime this year.
• Origin Materials planning to go public sometime this year.

Sac’s IPO heyday

The region’s peak of publicly traded companies was in the 1990s.

The Money Store Inc., based in West Sacramento, was the region’s largest publicly traded company when it was bought in 1998 by First Union Corp. The Money Store is gone, but it left the legacy of The Ziggurat, the 10-story pyramid-shaped building it built as its headquarters in West Sacramento.

In the mid-1990s, the region’s largest publicly traded company was Foundation Health Corp., which employed 3,000 locally and had a market capitalization of more than $1 billion. By the end of the 1990s it had become Health Net Inc. and moved its headquarters to Southern California. Heath Net was acquired by Centene Corp. in 2016. Centene is based in St. Louis but is establishing a large regional office in Natomas.

Other public companies that have come and gone include tech companies such as Level One Communications, which was bought by Intel Corp. in 1999 and Objective Systems Integrators, which was bought by Agilent Technologies Inc. in 2001.

Also, many locally based banks, including Western Sierra Bancorp, Humboldt Bancorp, Community First Bank, Folsom Lake Bank and Bank of Sacramento have been bought out since the 1990s.