First it's Barron's, now it's CBS MarketWatch
UBID auction likely to get out of hand
Sneaking in through the back door doesn't always work
By Darren Chervitz, CBS MarketWatch
Last Update: 12:32 PM ET Nov 30, 1998
SAN FRANCISCO (CBS.MW) -- The idea is simple enough. Investors
looking to get in on a hot initial public offering go through the backdoor by
buying shares of an already public firm that owns or has a significant stake
in the soon-to-be-public company.
In the past couple of weeks we've seen several
examples of this phenomenon, most notably with
Creative Computers (MALL), which plans on
spinning off its uBID auction unit this week. Before
Monday, the stock had zoomed ahead more than
525 percent this month on news that it was
reviving plans for the uBID offering, originally
announced in July.
There's little question that uBID will be a screamer and in the first few
days of trading could even outperform Ticketmaster Online/CitySearch,
the other, more solid Internet offering coming this week.
Company
Symbol
Location
# of Shares
uBID
UBID
Elk Grove, Ill.
1.58 mln
Offering price
Major underwriters
Long-Term Rating
$13 to $14
Merrill Lynch
William Blair & Co.
Credit the expected strong performance of uBID, which is a so-so
company competing in a crowded market, to a display of impeccable
timing. Not only has the interest in IPOs come roaring back, but Internet
stocks have taken off for outer space faster than John Glenn. The bidding
for the online auctioneers has been particularly intense.
Take, for instance, eBay (EBAY), which before Monday was up more
than 1000 percent since its September IPO. Or Onsale (ONSL), which
more than quadrupled in recent weeks. Onsale's meteoric rise came in
spite of a disappointing third quarter that spurred a couple of analysts to
downgrade the stock (Unlike uBID, these analysts did not enjoy
impeccable timing).
Not only are uBID's competitors trading at much higher valuations, but the
supply/demand imbalance that's fanned the flames of recent IPOs like
Theglobe.com (TGLO) is going to be much more severe with uBID, since
the company will only be selling at most 1.82 million shares.
Given the powerful retail broker army of co-manager Merrill Lynch, I
wouldn't be surprised to see uBid's IPO match the first-day success of
Theglobe.com and at least temporarily near triple digits.
Since Creative Computers intends to distribute to its own shareholders
sometime in 1999 the 7.3 million shares it will own in uBID after the IPO,
Creative's stock, when it was at $10 or so, was indeed a, well, creative
way to play the uBID IPO.
But like this whole entire Internet craze, things got out of hand. On a
diluted basis, Creative Computers has 10.4 million shares outstanding,
meaning that a Creative shareholder will get about 0.7 shares of uBID
(7.3 million shares/10.4 million) when and if the distribution is eventually
made (tax issues could still derail the payout).
Assuming the appropriate value for a uBID-less MALL is about $10
(about where it was before the madness began), then shareholders buying
Creative at its height on Friday were paying about $53 to get 0.7 shares
of uBID, implying a stock price for uBID of about $75.70 and a market
cap for uBID of about $690 million.
But here's the problem: uBID may reach the heavens on its first day of
trading, but it's unlikely to stay there. First, investor sentiment in the
Internet sector is bound to turn around again, as it's done several times in
the past three years, and the price-to-sales multiples now being afforded
online stocks will fall.
Although it's too early to tell if Monday's trading is a real change in
investor psychology for Net stocks or just a brief pause, we're getting a
glimpse of what's likely to occur in the future. Creative Computers fell 11
3/8 to 45, while Onsale plummeted 26 percent.
Second, uBID is no eBay. Auction sites are not created equal. Like
Onsale, uBID operates a business-to-person auction site, which is much
different than the person-to-person model eBay is pursuing with great
success. While Since uBID must pay for and store the goods auctioned
off on its site, the company's gross margins are a teeny-weenie 8 percent
of revenue. That compares to an 86-percent gross margin for eBay.
And if you think that Onsale or uBID can just easily start offering a similar
person-to-person auction service, think again. Onsale tried to do that but
failed badly and had to let Yahoo take over the service. (Of course, the
presence of a Yahoo, which doesn't charge its users any fees, in the
person-to-person space is an issue for eBay, but we've already gone
there. See related story).
Plus, uBID isn't even an Onsale. For the first nine months of the 1998,
Onsale had 7.1 times uBID's sales total of $24.1 million. Onsale's margin
of about 10.3 percent was also significantly better than uBID.
I P.O.nder
Look, uBID is a nice site. Revenues have surged in the year it's been in
operation. But margins are small and the company will have to spend lots
of money to build its brand and generate more traffic.
The company's potential is substantial. Sales of computing and electronic
products via the Internet are expected to rise to about $10.5 billion by the
year 2002, according to Jupiter Communications. Plus, uBID already
offers consumer electronics and some leisure products and plans to
expand its product line further in the future.
But I'm still leery about how successful auction retailing will become. It
takes too long, the bargains aren't that good, and then there's the
annoying chance you can go through the whole process and not even get
the item you want. uBID's argument that the auction format "entices
customers to participate ... in hopes of 'hitting the jackpot'" doesn't wash.
No question, uBID will be a moonshot on its first day. People now
looking to Creative Computers as a cheap way to play the IPO may want
to consider the fate of Winfield Capital (WCAP) and Tech Squared
(TSQD-BB), two other stocks that investors used this year as IPO
proxies for Cyberian Outpost (COOL) and Digital River (DRIV),
respectively.
In both cases, the small-cap stocks surged to 52-week highs right before
the IPOs, but have since fallen more than 50 percent after the newly
public stocks didn't perform up to expectations.
At its offering price, uBID is a decent value, given the market cap of its
competitors and the risk-reward ratio involved in this kind of speculative
investment. But if uBID rises as high as observers think it might, investors
would be wise to sit out this auction.
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