I thought this interesting article in today's IBD helps explains the strange valuations between an IPO and its parent company:
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
Nothing creates a buzz like an Internet IPO. And that buzz can be worth plenty - in the very short term.
Take Creative Computers, which spun off its UBid online auction unit Dec. 4. In the weeks prior to the offering, shares of Creative rocketed as much as 600%, from 9 on Nov. 9 to an intraday high of 63 on Nov. 27.
I N V E S T O R ' S C O R N E R
But all that momentum came to a screeching halt. A week after UBid's IPO, Creative's stock has tumbled to 22 and volume has dissipated. That's despite a 138% jump in shares of UBid from its offering price.
With other potential Internet spinoffs looming, it's worth noting that investors don't seem to be crediting the parent company's stake in an IPO with the same valuation given to stock of the Internet pure play.
While a large stake in an Internet company can add value to the parent firm, it won't add to the bottom line, analysts say.
''Buy the anticipation, sell the realization'' has been the approach of investors, said David Menlow, president of Millburn, N.J.-based IPO Financial Network, which forecasts the opening premiums given to IPOs.
''They don't want to speculate on the parent company'' after the offering, said Mark Basham, IPO analyst at Standard & Poor's Equity Group.
Those realities of investor psychology have never been more evident than in the case of Creative Computers, a Torrance, Calif.-based direct marketer of computer products. The company retained about 7.3 million shares, or 82%, of UBid, which are now worth $260 million.
But the market value of Creative Computers is only about $237 million. That means investors are either discounting the value of UBid stock, or they believe that Creative's direct marketing business has no value at all.
Ryan Jacob, portfolio manager of The Internet Fund, favors the first explanation. ''What that tells you is that people don't believe UBid will hold at that level,'' he said.
Even when UBid soared as high as 601/2 on its first day of trading and closed at 48, up from its offering price of $15 a share, Creative Computers finished the session down 9 points.
Jacob suggested that some traders may have been been let down by UBid's mere 220% advance on its debut.
''People, I think, have such wild expectations. Two hundred percent is somewhat of a disappointment,'' he said.
They may have been hoping for a repeat of EBay's success. That online auctioneer, which has a much broader range of offerings, came public Sept. 24 at $18 a share. It now trades around 179 and sports a hefty market capitalization of more than $7 billion.
But analysts say the Internet auction business is getting increasingly competitive, and UBid isn't expected to turn a profit any time soon. Still, investors interested in owning UBid might consider buying its lesser-valued parent instead, Jacob says. Creative Computers said it intends to distribute its remaining stake in UBid to shareholders in six months.
With IPOs, ''You have to wait six months and see where it settles out to get a real sense of the company's value,'' said Gail Bronson, senior analyst at IPO Monitor.
Creative Computers isn't the only parent company to suddenly get a cold shoulder from investors after the debut of its Internet offspring.
Shares of USA Networks, a St. Petersburg, Fla.-based broadcast company, shot up as high as 37 on Dec. 3, the day Ticketmaster Online- CitySearch came public. But USA closed off 3 1/4 at 30 5/8 and has since fallen to 28 11/16.
USA now has a market capitalization of about $4.6 billion, nearly the same value it had in March, three months before it completed the Ticketmaster merger. But USA's current 60% stake, or 42 million shares, of Ticketmaster Online, are worth about $1.7 billion.
The prices given to Internet stocks ''can't be supported by any traditional means of valuation,'' Basham said. And investors seem to buying the stocks ''regardless of valuation or prospects.''
Clearly, it's not just sophisticated investors buying these stocks. After all, shares of building-maintenance firm Temco Service Industries jumped nearly 40 points last week when its ticker, TMCO, was confused with that of Ticketmaster Online, TMCS.
With the unprecedented valuations being given to the category, companies that have Internet operations ''just can't ignore'' the rewards of an IPO, Menlow says. Among the companies who've said in recent days that they're considering such a move are Navarre, Network Event Theater and IDT Corp.
''You either believe in the parent company or not,'' Bronson said.
Menlow believes the market will become saturated with new offerings, especially after some don't live up to their billing.
''Everyone will have had their fill,'' he said.
|
