5/12/98 RedHerring article. IS VERIO'S IPO JUST TAKEOVER BAIT?
[Does anyone know ASND's relationship w/Verio]
Excerpt: "Citing International Data Corporation, Verio claims that
total ISP revenues are projected to grow from $3.3
billion in 1996 to $18.3 billion in the year 2000"
By Peter D. Henig
May 12, 1998
Verio's (VRIO) initial public offering priced Monday
evening at 23, and began Nasdaq trading on Tuesday.
"It was a solid opening," said Ken Fleming, an analyst
with the Renaissance IPO Fund, of Verio's 30 percent
rise to a first-day high of 30, before settling at 27.06, up
4.06.
At the last minute, the underwriters, led by Salomon
Smith Barney, offered an additional 500,000 shares on
top of the proposed 5 million, and increased the pricing
range from 18-20 to 22-23, moved by strong
institutional interest in the stock.
A brand -- for what?
Mr. Fleming notes that Verio doesn't compare to
Broadcom (BRCM), the cable-modem chipmaker which
saw a 200 percent rise in its moon-shot public offering.
But Verio's performance, he says, "is still solid in the face
of weaker trading in Internet stocks right now."
Any comparison would be quite a stretch. Broadcom's
breakthrough products differentiated it from its
competitors in the chip market. Verio, on the other hand,
has spent a ton of money buying customers and building
brand-name recognition in the Internet service provider
market -- and it's not clear that the economies of scale it
hopes for will let it earn back the capital costs it's
incurring.
In its prospectus, Verio bills itself as a leading national
provider of Internet connectivity and enhanced Internet
services to small and medium-sized businesses.
However, Verio is really a consolidator of a slew of local
and regional ISPs -- 37 to date, and counting -- which it
hopes to integrate under one roof and operate through
facilities it owns and on network capacity it leases from
Qwest Communications (QWST).
The worst of the best
Even under the new Internet paradigm of
hypergrowth-sans-earnings, Verio in particular looks
worst than most.
With 32.2 million shares outstanding, Verio now
possesses an eye-popping $900 million market
capitalization based on Tuesday's closing price. That's a
lot of dough for a company that, according to documents
filed with the Securities and Exchange Commission, only
made $88.2 million in 1997 but spent $146.1 million.
Shouldn't a loss of $64.1 million attributable to common
stockholders should make investors think twice?
"It's hard to analyze the fundamentals of this company
because it's really 37 different companies," says Mr.
Fleming. "The combination of rollups and [Verio] being
an Internet company shows that investors have been very
favorable to both."
Sinking in a rising tide
Citing International Data Corporation, Verio claims that
total ISP revenues are projected to grow from $3.3
billion in 1996 to $18.3 billion in the year 2000, and
further states "that industry analysts have reported that
small and medium-sized businesses represent a potential
market of over 7 million customers in the U.S."
The industry's poised for takeoff, then. But Verio's
acquisitions don't appear to be adding enough revenue to
its top line. After burning through more than $100 million
in venture capital money and reporting a postoffering
debt of $273 million, Verio only has 100,000
subscribers. "The tide rises and all boats go up? I'm not
so sure," says Francis Gaskins of Gaskins & Co. IPO
Desktop.
Telcos like GTE and WorldCom aren't standing still,
either, which may be why Verio has allowed Nippon
Telephone and Telegraph to buy up to 12.5 percent of
the company in a private placement, and counts
competitive local access provider Brooks Fiber
Properties, a WorldCom unit, as a 23 percent
stakeholder.
Losing money the old-fashioned way
It's not that hard to lose a bunch of money buying ISPs,"
says Mr. Gaskins. "That's the easy part. The hard part is
to keep the financing going to feed the hemorrhage."
Verio recognized this in its prospectus: "There can be no
assurance that the company will achieve or sustain
positive operating cash flow or generate net income in
the future.... Given the company's limited operating
history, there can be no assurance that the company will
ever achieve broad commercial acceptance or
profitability."
The greater fool theory
So why did the market sink over $260 million into
Verio?
"It's a classic case of the greater fool theory -- some
large telco or Japanese company will play the greater
fool and buy them out," says Mr. Gaskins. "I think their
plan is to put all this together and then get out in time ...
and they'll laugh all the way to the bank."
The public offering, surprisingly, fits into a buyout plan.
The more cash Verio has, the more acquisitions it can
make. For companies who need traffic on their
networks, like WorldCom (WCOM), Qwest, or Level 3
Communication (LVLT), Verio's subscriber base
becomes more attractive with every ISP it adds.
In fact, now that Verio is a public company worth almost
$1 billion dollars -- more than twice the market cap of its
nearest competitors, PSI Networks and Concentric -- it
can acquire more revenue without worrying about
short-term losses.
"Maybe they won't be bought out," concludes Mr.
Gaskins. "All they needed to do was get bailed out by
the public markets, so perhaps it's the market that's the
greatest fool of all."
Verio Inc.
1997 sales: $88.2 million
1997 income: -$64.1 million
Filing date: February 27, 1998
Offering amount: $95.0 million
Shares offered: 5.5 million
Proposed offer price: $22.00 to $23.00
Actual offer price: $23.00
Stock symbol: (VRIO)
IPO date: May 12, 1998
Proposed Exchange: Nasdaq
Underwriters: Salomon Smith Barney, Credit Suisse First
Boston, Donaldson Lufkin Jenrette |
