DON'T HOLD THAT SECONDARY!
By Peter D. Henig
Red Herring Online
November 20, 1998
If IPOs are suddenly smelling cash, secondary offerings are not far behind, as two Internet companies prepare to offer a second round of shares to the market.
Inktomi (INKT), the Internet search and caching firm, will offer 3 million shares to the market in its first secondary offering since going public in June, when it sold 2.2 million shares at $18 each in a monster debut.
The company itself will offer 300,000 shares, and certain stockholders and company insiders will offer 2.7 million, now that their 180-day lockup period is over.
At the same time, DoubleClick (DCLK), the Internet advertising solutions company that's regarded as the market leader in its space, has also just filed its intentions to do a secondary offering of 2.5 million shares.
Analysts approve
Neither of these secondary offerings should be regarded as foolish or surprising moves.
"It's smart of them to do it, especially when their valuations are high," says Dana Serman, Internet analyst with Schroder & Co. "They suffer very little dilution and they get to raise a ton of cash."
In fact, Mr. Serman contends that it is unlikely that these offerings will even dilute the value of their stocks.
"If investors feel that the $400-500 million raised, when put to work, could improve the company's bottom line, that could outweigh the extra number of shares being put out on the market."
Rather than have a short-term oversupply, or overhang, of available stock that could be offered on the market after the lockup period has ended, companies typically will sell such shares in one fell swoop, generally to institutional investors.
"It benefits the company as much as it benefits the institutions who are trying to establish a position in these stocks without bidding up the share price," says Ryan Jacob, portfolio manager with The Internet Fund. "These names are volatile and very thinly traded, and that much stock being sold, if it's not executed in orderly way, could create problems."
And this may just only be the beginning. Keith Benjamin, Internet analyst with BancBoston Robertson Stephens says he expects to see more secondary offerings, "given the current display of interest." And when we ask whether they are a necessary evil in this high-growth Internet environment, Mr. Benjamin replies, "They are only evil if they don't work out."
Secondaries' second wind
The interesting thing is that secondaries had taken a breather right along with the lousy market for IPOs.
Investors had remained shellshocked during September and October following the market's panicked 29 percent selloff, and except for Broadcom's offering (BRCM), secondary issues seemed nonexistent. This is in stark contrast to earlier in the year when Lycos (LCOS), Preview Travel (PTVL), Sportsline USA (SPLN), N2K (NTKI), and other Internet plays all sought secondaries one right after another.
Now, with DoubleClick's secondary to sell an additional 2.5 million shares of stock beyond the 16.5 million it currently has outstanding, "it looks like we've got a market here all over again," says John Fitzgibbon, editor of the IPO Reporter.
Given a recent price of approximately $34 per share, DoubleClick is hoping to raise about $85 million for the company.
Its underwriters, Goldman, Sachs & Co.; BT Alex. Brown, Donaldson, Lufkin and Jenrette; and Salomon Smith Barney, were granted a 375,000 share overallotment option, which if exercised would provide the company with another $12.8 million.
But the unusual thing about DoubleClick's secondary offering is that none of the insiders are selling; according to Mr. Jacob, all of the shares are being offered by the company.
"That's rare," says the portfolio manager. "Inktomi is more normal; it's a mix."
It's especially rare, given that insiders are usually clamoring to cash out some of the shares they had so dearly longed for prior to the company's IPO -- perhaps garnering a little extra pocket change for some pre-holiday online shopping.
"When stocks run up like thunder, insiders try and cash out so that their wives can have their fur coats for Christmas," says Mr. Fitzgibbon. "Or maybe their girlfriends a Porsche." |
