Dear Joe,
Many of the postings on SI seem to be trying to forecast the future progress of ADSL and,in particular, the future of AWRE. Few have hit on the highly likely possibility that AWRE will probably be acquired, very likely sooner rather than later.
I hold this view because of the nature of the company, i.e. basically an R&D shop; and, the nature of the controlling shareholders, i.e. wealthy individuals who invested the initial venture capital that probably have a relatively short investment time horizon. I believe that AWRE was created to be sold and now that their technology appears to have established some value we are could be close to that sale.
AWRE is the smallest player in the ADSL Internet industry consortium. Why was such a tiny player even mentioned? The reason is that AWRE has the splitter-less technology. AWRE has apparently solved a major ADSL problem.
A major industry player could view the acquisition of AWRE as an initial step in quickly staking out a position in the next generation of Internet communications technology. For example, look at the recent acquisition of Amati by Texas Insturments. The price was $394 mil in cash. Amati had only $13 mil of revenue in 1997, a multiple equal to 30X sales! This was an acquisition of technology.
The acquisition of Amati gives us a feel for the hunger that now exists for getting an early foothold in Internet communications technology and the extraordinary price that can be paid. Companies, like TI are perfectly willing to acquire technology at big prices if it enables them to get into the market with workable product before their competition. ADSL will be in wide usage within a few years and it will generate enormous positive cash flows for the winner. Make no mistake about it ADSL will be a very big business. AWRE is too small to ever be a significant player in ADSL but it would not be surprising to see someone acquire the company to lockup the technology. This will happen even before the technology is fully perfected because time is the most important factor. Anyone that wants to be a leader in ADSL must be gathering his acorns today!
What is the AWRE technology worth? I have no idea but being an old investment banker, I know that comparable transactions are an important element in establishing value during M&A negotiations. The Amati deal provides a rough benchmark. Let's do a quick and dirty analysis.
The 12/27/97 Robertson Stephens report on AWRE projects $25 mil of revenue in 1998. In mid-1997, AWRE had about 19,160,000 shares outstanding and about 700,000 options, or about 19,900,000 fully diluted shares. At 30x the 1998 projected revenue, the value would be $750 mil or $37.69 per share. If ADSL gets off to a slow start and 1998 revenue is only $15 mil, the value would be $450 mil or $22.61 per share.
These numbers are really high for such a tiny company but we cannot ignore the fact that the big players are going to be involved in a "cat fight" to dominate the ADSL market. The objective is to be in the market first with a product and often the acquisition of technology can give one the lead. Under those circumstances and considering the potential size of the ADSL market, it is not unreasonable to expect that big prices will be paid early in the game to acquire technology. Also, consider that the potential buyer probably has a ton of cash on its balance sheet. Paying cash instead of stock lessens the dilution problem and could lead to a quick deal that is done in a blink.
It is interesting to note that AWRE has been financed by private parties who invested all the initial venture capital. These are wealthy individuals operating here in Chicago who have been very successful in the local options and futures markets. I don't personally know them but I know a bit about them. They are low key and get little publicity and probably want to keep it that way. They are for real and have great personal wealth.
It has been my experience that when individuals invest in venture capital situations the have a shorter time horizon for taking profits than a large venture capital firm funded with institutional money. Generally such individuals have few deals in their portfolio compared to a big venture firm. If they overstay in a deal they risk losing some or all of their unrealized gain if something goes wrong. A large venture capital firm has a similar problem but with a diversified portfolio they have grater latitude to hold on longer. But, in any case venture capital investors like to realize gains as soon as possible, it is just that individuals usually have a quicker trigger.
A sale of AWRE is the logical exit and the best time to sell a research oriented company is when you have the technology and the big players are beginning to position themselves. I think 1998 will be a crucial period for the big companies to make strategic moves that set them up for the coming ADSL boom.
In the interest of disclosure, I do not own any stock of AWRE. But, I was a shareholder in late 1997. I sold my position at a small profit because I wanted to raise some cash in what looked like an uncertain market. In view of what has happened recently in the industry, AWRE looks very interesting today. But, I would not buy this company with the idea that this midget will someday be an ADSL leader. If I buy it is the potential sale aspect that gets my juices flowing.
DAN
|
