Mark Veverka, the Barron's "Plugged In" columnist has some disparaging words for the CDOV offering.
Of course, along with the handful of stellar offerings that have the horsepower to go out during even the most tepid of IPO markets are scores of flimsy concerns trying to seize the moment, grabbing what might be the last gasp of easy money while the grabbing is still good.
Among the latter is Comdisco Ventures, a division of the global technology services stalwart by the same first name. The parent company was started by a former IBM executive as a leasing company of big-iron computers. It went public in the Dark Ages of technology 29 years ago, and currently sports a hefty market cap of about $4.05 billion. After trading as high as 57 1/4 in March, Comdisco's shares closed Friday at 26 5/8.
Comdisco Ventures, on the other hand, is a puffy souffle of dubious distinction. First of all, Comdisco plans to issue the shares of its Menlo Park, California, division as tracking stock. As if that weren't enough to keep the stock tethered, Comdisco Ventures is a technology incubator, aspiring to be another CMGI or Internet Capital Group, with equity stakes worth about $530 million in about 75 companies as of March 31. What's more, a boatload of those investments are in profitless dot.coms, including such business-to-consumer clunkers as Living.com, which filed for Chapter 7 bankruptcy just a few weeks ago.
Venutre-capital sources say Merrill Lynch, which is the lead underwriter of Comdisco Ventures' offering, plans to price the IPO in late September of early October. Comdisco Ventures Chief Executive James Labe would not comment, citing quiet period restrictions; a Merrill Lynch spokesman also declined to comment.
Of course, the authors of the prospectus on file don't refer to Comdisco Ventures as an incubator because that word is verboten in the spin-sensitive vernacular of tech bankers these days. Ever since divineInterventures, a Chicago-based incubator, shoved its IPO out the door this summer -- firing its original underwriter in the process -- incubator stocks seem to have fallen out of favor. Divine's shares are now underwater. Thus the avoidance of the I-word.
But that's not all we couldn't find in the Securities and Exchange Commission filings. In hundreds of pages of documentation and amendments, nowhere could be find mention that a key executive largely responsible for much of Comdisco Ventures' meteroric growth quit the company just prior to its initial IPO filing last March. Manuel Henriquez, a managing director and president-designate of Comdisco Ventures, resigned by unknown reasons, venture-capital sources say. No press release was published and his defection has been omitted in SEC documents. When reached by telephone, Henriquez would not comment about his departure.
Apparently, the retention of top dealmakers and junior financiers has been a problem at Comdisco's Silicon Valeyy outpost; upwards of a dozen employees have gone missing in the 39-person office during the past five years according to venture capitalists. Many have left Comdisco to run their own funds, including former Comdisco Ventures managing directors Steven Bird and Kevin McQuillan, who are now partners of Charter Growth Capital in Menlo Park. When reached by phone, Bird would not comment about Comdisco Ventures, and McQuillan could not be reached.
Through it all, however, Comdisco Ventures has been anchored by its highest ranking official, CEO Labe, 43, who has been involved in debt financing for 17 years and founded Comdisco's venture division in 1987, according to SEC documents. Yet it wasn't until Henriquez' arrival three years ago, from investment banking boutique Robertson Stephens, that Comdisco Ventures aggressively pursued a new category of high-risk financing of venture-backed start-ups, referred to as "venture debt."
Venture debt is usually structured as an equipment loan or a subordinated loan. The debt bears fixed interest rates with coupons currently ranging from 8% to 13% per year, although the effective rate may be greater. As part of the transaction, Comdisco Ventures receives warrants to purchase an equity interest in its customer, or a conversion options, in each case at a stated exercise price based on the price paid by venture capitalists.
Comdisco Ventures has become a major provider of venture leases, venture debt and direct-equity financing to venture-capital-backed companies. But in recent months, the division has become much more dependent on stock warrants related to the venture-debt deals, said Thomas Kmiotek, a debt analyst at Fitch in Chicago.
"They have had more warrants over the past nine months, and they have a bigger position in direct equity [investments]," says Kmiotek. On August 1, Fitch issued a release downgrading the outlook for the debt of Comdisco, the parent, to "negative" from "stable."
The reason for the more pessimistic outlook is that Comdisco has taken on more risk in the past 18 months as the company restructures its core leasing business and become more dependent on its venture operations for profit. For the most part, Comdisco is using conservative commercial paper to finance Internet investments and its venture-capital business.
Investors need not look much further than the March quarter to see how dependent Comdisco has become on its risky venture business. Earnings for the quarter of $43 million, or 26 cents a share, outpaced a loss of $56, or 37 cents, for the same quarter last year. Total quarterly revenue for the parent was $1.01 billion, up about 6% from $952 million during the year ago quarter.
The rise in revenues was largely due to the stellar performance of Comdisco Ventures, offsetting a downturn in leasing sales, according to SEC filings. More specifically, the second quarter was a record-breaking one for the venture group fueled largely by equity investments. Net proceeds from stock and warrant sales were $98 million during the quarter, versus only $17 million during the same stretch a year previous.
Of course, much of those lights-out returns were probably booked before the Nasdaq meltdown, which as we all know has been a Waterloo for Internet stocks. How Comdisco's incubator performs during the September quarter and future quarters is less certain.
If the IPO market perks up, Comdisco's stakes in networking and telecom-related offering might offset dot.com deadbeats, such as Living.com. But the long-term value of these tracking shares is beyond us.
Much of Comdisco's dramatic shift toward aggressive dealmaking and venture investing has been attributed to its relatively new chief executive, 35-year-old Nicholas Pontikes, son of founder Kenneth Pontikes, who built the computer-leasing giant from scratch.
The scion cut his teeth at junk-bond purveyor Drexel Burnham Lambert after dropping out of the University of Illinois to pursue a careet on Wall Street. But now, through the calculating prospects of an incubator tracking stock, it appears he has acquired a fascination with Silicon Valley's Sand Hill Road as well. |
