From Sunday's Chicago Tribune:
chicagotribune.com
Comdisco's market ride
gets bumpy as potential
IPO ventures lose luster
By James P. Miller
Tribune Staff Writer
August 13, 2000
Roller coaster rides are not always fun. Just ask
Comdisco Inc.
Long known as a stable, low-key technology-services
provider, Comdisco has—through an aggressive
repositioning effort—yoked its fortunes to one of the
most volatile segments of the stock market.
The jury is still out on the corporate makeover
designed by Comdisco's ambitious 35-year-old chief
executive, although his plan has drawn generally
positive reviews.
But this much is already clear: The dizzying jumps and
drops the company's stock has seen over the past 12
months aren't an aberration. Comdisco shares are
likely to continue seesawing up and down, moving in
tandem with the fickle marketplace for high-tech initial
public offerings.
How does a company that has spent three decades in
the slow-but-steady lane suddenly find itself being
whipsawed by the mood swings of the IPO market?
In part, because of moves made by Nicholas
Pontikes, the investment-banking specialist who last
year assumed the CEO post his father once held at
Comdisco.
Under the younger Pontikes, the company has
jettisoned its former core business of mainframe
computer leasing, launched a major rebranding effort,
and poured money into Internet start-ups as strategic
investments. And for the past year, Comdisco has
been earning more from those high-tech investments
than from its conventional operations.
While the company's individual investments are
relatively small, the overall size of the bet it has riding
is big: Comdisco has more than $2 billion invested in a
grab bag of development-stage tech companies.
Some of those companies have already gone public,
generating eye-catching paper profits for Comdisco.
That's good for earnings, but it also ties Comdisco's
profits to the chronically unpredictable IPO market.
Comdisco's investment portfolio represents
"significant hidden value," according to U.S. Bancorp
Piper Jaffray analyst Michael Grondahl. But the
analyst, who rates the company's shares a "strong
buy" for aggressive investors, also notes that "the
health of the IPO market is key" to Comdisco's ability
to turn its venture stakes into profits.
Last year, with dot-com mania in full cry, Comdisco
shares soared on investors' infatuation with the profit
potential at its venture-funding group. Investors'
appetite for new high-tech offerings seemed insatiable,
and Internet-oriented companies in which Comdisco
has invested went public with ease.
But tech stocks went into a nose dive this spring, and
the frothy IPO market slowed dramatically. That
slowdown stalled Comdisco's efforts to capitalize on
the venture group's success. The company's shares
went into a steep decline, even though its
tech-services businesses have continued to perform
well.
After a months-long dry spell, the IPO market has in
recent weeks started to show signs of renewed life.
But right now, near-term prospects for Comdisco's
potentially lucrative investment portfolio look a lot less
interesting to the impatient momentum players who
swarmed into the stock last year.
Chicago-based Blair Capital Management Corp., for
instance, dumped all its shares of Comdisco last
month.
"Right now we're in a kind of crazy marketplace,"
says Lester Blair, Blair's chief investment officer. "You
don't have a lot of time to see if a company will be
able to pull off its plans." Based on conversations with
management, Blair said he thinks the "positives" at
Comdisco are still in place, but "they're going to take
longer to happen."
Comdisco has gone through changes before. Founded
in 1969 by onetime IBM executive Kenneth Pontikes,
the company originally specialized in buying
mainframe computers and leasing them to Fortune
500 corporations.
Over time, networked systems and personal
computers began to displace the big centralized
computers that had long been Comdisco's cash cow,
and profit margins came under pressure. Comdisco
responded by expanding its leasing activities to
include personal computers and other
information-technology equipment, even
non-computer gear such as medical equipment.
It also diversified, setting up a continuity services
group which, among other things, maintains data
centers where computer-dependent client
corporations can go to continue operations if their
own systems are destroyed by fire or some other
disaster.
In 1994, founder Ken Pontikes died, and he was
succeeded by the company's No. 2 official, Jack
Slevin. Over time, Slevin began turning the reins over
to Nicholas Pontikes, the founder's son.
Nicholas Pontikes had joined Comdisco in 1992.
Before joining the company his father founded, he had
served hitches in the merger-and-acquisition
departments of two high-powered New York finance
operations: acquisition-minded Blackstone Group and
the now-defunct junk-bond M&A specialist Drexel
Burnham Lambert. He had also helped co-found an
investment company, Avalon Capital Corp.
Nicholas Pontikes, who currently has voting control
over a 25 percent stake in Comdisco, rose swiftly
over the years, from vice president to senior VP to
executive VP to chief operating officer in late 1997
and to president in late 1998. In January 1999 he
added the chief executive title, putting a Pontikes in
the top job once again.
Pontikes and other Comdisco officials declined to
comment for this story, citing "quiet period"
regulations that restrict what companies can say in
advance of a public securities offering.
To clarify the value of its Comdisco Venture group,
Comdisco hopes to issue a special "tracking stock."
Tracking stocks allow a company to separate a
particular division that may have a different value than
its main line of business without going to the trouble of
spinning it off.
In the company's latest annual report, Pontikes made
his philosophy clear, telling stockholders that
Comdisco "continued to evolve our business strategy
to invest in higher growth, higher return initiatives; sell
under-performing assets; speed up the introduction of
new products and services; complete a number of
strategic acquisitions and alliances; and begin to build
our brand as the leading global technology services
company."
The changes that the second-generation Pontikes
CEO has overseen at Comdisco are indeed striking.
Last year, Comdisco shed the mainframe-leasing
business that was its original foundation, along with
certain other assets. Wall Street welcomed that move,
although the divestitures generated a $150-million
charge.
Comdisco continues to lease other high-tech gear,
where profit margins remain strong.
It has also expanded its Web-related services. And to
further increase its presence in the Internet sector, the
company last year purchased a development-stage
provider of Internet access, Prism Communications
Services.
Prism's price tag hasn't ever been disclosed, but
Comdisco has sold 1 percent stakes in Prism to two
telecom companies for $10 million apiece—a price
that gives the unit an indicated value of approximately
$1 billion.
Prism isn't yet carrying its own weight. The provider
of high-speed digital subscriber line, or DSL, Internet
service has been spending heavily on an expansion
program, and as a result has rung up pretax losses
totaling $166 million over the past five quarters.
The Prism acquisition represented another big change
in Comdisco's business model. But the company was
not expecting the capital-intensive unit to be drawing
down only its parent's resources by this time. Last
winter, Comdisco announced plans to take Prism
public through an initial offering. But the Prism IPO
never got off the ground, thanks in large part to the
tech sector's sudden April drop-off. Late last month,
Comdisco disclosed, without elaboration, that it has
asked its investment bankers to help officials explore
"strategic options" for Prism.
Salomon Smith Barney analyst John B. Jones, who
rates Comdisco a "buy, medium risk," recently
lowered his 12-month target price for Comdisco to
$40 from $50. In a report, he told investors that the
lowered target reflects his view that "the probability is
high that this business missed the IPO window" for
telecommunications companies in Prism's sector.
The high-tech sector's fall from grace caused other
problems for Comdisco. The company had started a
venture-investing arm back in 1987, but in the past
couple of years Comdisco has cranked up the scale
of the formerly modest operation.
The company, which has made something over $2
billion in venture investments in the past 13 years,
invested $575 million in the fiscal year ended Sept.
1999 alone, and $850 million through the first nine
months of this fiscal year.
The venture group provides promising new companies
with leased equipment, but the cash-short start-ups
pay Comdisco partly in cash and partly in warrants to
buy their stock.
When such companies go public, the warrants
Comdisco owns can suddenly be very profitable.
Comdisco's venture portfolio currently includes stakes
not only in hundreds of closely held companies, but
also in about 80 publicly traded companies as well.
Some of them are well-known names, including
Copper Mountain Networks Inc. and Inktomi Corp.
And as of late July, Comdisco had on its books about
$484 million in unrealized gains on the public
companies.
As for Comdisco's tracking stock, the company had
planned an initial public offering for this spring, to be
followed by a distribution of the remaining tracking
stock to existing holders.
But that plan, too, has been stalled by the IPO
market's recent troubles. U.S. Bancorp's Grondahl
thinks the tracking stock will be offered this autumn. |
