Carolyn was interested in IPO's these are the ones coming up!
See you here about 9:00 my time tomorrow morning, so we can map out our game plan!
Morningstar.com
The IPO Week Ahead
By George E. Nichols
Lately, IPOs with eye-popping returns have been as rare as a firefighter in Antarctica. But
some recent offerings have exceeded expectations, including Accelerated Networks (Nasdaq:
ACCL - news) tripling on Friday. And plenty of other companies are waiting in the wings to
take advantage of this market upswing.
Chicago, home of only 10 technology IPOs last year, is expected to have three this week,
including divine interVentures (DVIN: ICGE) and Stratos Lightwave (STLW: ICGE).
Although Illinois is the birthplace of the Web browser, this area known as the ``Silicon Prairie''
has been playing catch-up with other regional hubs for the last few years.
Leading the charge is business-to-business (B2B) Internet incubator divine interVentures. But since its original December filing,
incubators and IPOs have fallen out of favor. The greatest concerns for this company are its limited track record and extreme
dependence on unproven startups, most of them in the Chicago area. Rival company Internet Capital Group (Nasdaq: ICGE -
news) is risky enough but at least it has more experience (since 1996), with several successful IPOs under its belt. Divine, by
contrast, didn't commence operations until last June.
In the meantime, Internet Capital Group has had the first crack at many promising investments, even those in divine's backyard.
Internet Capital Group claimed a 40% stake in the promising local B2B company Commerx, while divine was left with table
scraps, purchasing a 1% stake later.
Other parts of divine's portfolio includes investments of about $360 million in cash, promissory notes, and stock in its portfolio of
companies. Determining a value for these private holdings is largely arbitrary--it will be years before most of them go public or are
acquired.
The firm also has $212 million in cash and marketable securities, so it isn't among the many dot-coms on the verge of insolvency.
But it still wanted to hasten its offering and, in an unorthodox move, switched to an underwriter who was willing to bring them
public immediately. Its urgency centered around boosting its cash for investing in startups and providing a morale boost for
employees loaded with stock options--much needed in the wake of recent layoffs. Despite these motives, though, it's still
extremely risky for divine to forge ahead with the offering in this rough market.
Divine's initial market cap is expected to be between $1.5 billion and $1.7 billion. Despite the market upswing, investors will have
great difficulty in absorbing an offering of this size. Anyone daring to buy this stock is banking on a healthy IPO market and a
huge payoff for Internet startups many years down the road.
Another Chicago company, while receiving less attention, is standing on firmer ground thanks to a steady stream of profits. Stratos
Lightwave hopes to achieve stratospheric market valuations. In its favor, the market for anything associated with fiber optics is
hot. Stratos is an optical-networking company, supplying gear such as transceivers and fiber optic connectors. The three
customers generating the most sales are top-notch: Nortel, Cisco, and Alcatel. Its leading competitors include highfliers Agilent
(NYSE: A - news), Finisar (Nasdaq: FNSR - news), Molex (Nasdaq: MOLX - news), and Infineon (NYSE: IFX - news).
Sales grew 55% to $71.8 million for the fiscal year ending in April, with most of that growth coming from the April quarter.
Although Stratos may not be the market leader, demand is greatly increasing for its products. Also, the company can boast of
profits, earning $3.8 million for the year ending in April and turning a profit every quarter in the past two years.
Despite the positives, though, investors eyeing Stratos Lightwave shares are better off looking elsewhere. Namely, its parent
company Methode Electronics (Nasdaq: METHA - news), which will retain 86% of Stratos shares. Assuming it prices at the
middle of its range, Stratos will attain an initial market cap of $1.1 billion. Thus, of Methode's $1.4 billion market cap, roughly $940
million could be attributed to the spinoff. The other $460 million is the value of Methode's core electronics business, which
translates into only 1.3 times sales and 17 times earnings. And if Stratos shares jump above its pricing range, Methode investors
will get a hot IPO plus a dirt-cheap electronics business. Although Methode's electronics business has flat sales growth, it enjoys a
solid balance sheet and profits.
The rest of the IPO calendar is unusually crowded, with 19 scheduled for this week according to IPO.com. These include Genuity
(Nasdaq: GENU - news), pofiled here last week, and Marvell Technologies (Nasdaq: MRVL - news), a company that will be a
smash hit with its focus on semiconductors for broadband communications. Growing like gangbusters and extremely profitable, the
tiny 7% slice of the company being offered to the public ensures it will open with quite a bang.
George E. Nichols can be reached at george_nichols@morningstar.com. |
