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Technology Stocks : 724 Solutions (NASD: SVNX, TSE:SVN) -- Ignore unavailable to you. Want to Upgrade?

To: Davy Crockett who wrote (311)	11/30/2000 1:54:40 AM
From: HeyRainier	Respond to of 337

I do not know how large (or how small, as the case may be) Tantau's revenues are. I believe Robertson Stephens put out an educated guess of around $10-$12 million for 2000, and estimated growth to $25 million for 2001. At a price tag of around $400 million in stock, that's quite a rich premium. R.S. has raised concern that the market may view it as being rich: "...The market may not be receptive to such a rich valuation, especially when compared to today's average publicly traded valuations of 10x 2001 revenues..." Significant share dilution doesn't help, and by using shares to acquire the company instead of debt, management would appear to be hedging its stance that the returns to its investment potentially may not exceed even the cost of debt. That is, debt produces a higher EPS if EBIT can grow at attractive rates, but if EBIT is likely to decline, equity financing is more desirable because of higher EPS at low operating levels. (Higgins) This is called market signaling, and the debt versus equity decision can provide insight into management's views on earnings prospects. Also, in general, I have seen companies issue equity to purchase other companies only when they feel their "currency" is richly valued. This too has negative implications for SVNX's current valuations. Interestingly, with the share dilution, Higgins sites a statistic based on academic studies: when companies announced a new equity sale, the average resulting loss in market value for the issuing firm averaged over 30% of the size of the new issue. That is, if a company issued $30 million in new equity, the market value of existing equity suffered a permanent loss of about $9 million ($30 x 30% = $9). I haven't watched the actual change in market values based on equity issuances, but if we were to hypothetically carry out that scenario for SVNX, assuming $400 million in new equity to be issued, if the historical research proved true, then there could potentially be a $120 million decline in the value of existing equity. All this may or may not happen, but I will be curious to watch tomorrow's reaction to the rich premium paid for Tantau. Rainier Disclosure: I have a position in SVNX.