Latest on sfe...I don't own any only cmgi John
Safeguard must modify approach to lure Wall St.
It envisions a network of Internet commerce companies. And it needs help selling stocks to
institutional investors.
By Joseph N. DiStefano
INQUIRER STAFF WRITER
For the past decade, Safeguard Scientifics of Wayne has been a kind of cult stock, allowing its
35,000 shareholders - mostly individuals, not big institutions - to get a rare first crack at investing in
new high-tech companies.
Occasionally a Safeguard-backed firm might be acquired at an attractive price, or sell stock in an
initial public offering (IPO). If the price was right, Safeguard investors made money.
And then came the Internet. Suddenly, IPOs are a license to multiply your money - and Safeguard is
planning to do more of them, in hopes a flood of Wall Street dollars will finance its vision of a
lucrative network of Internet-commerce companies.
But there's a trade-off.
Safeguard needs Wall Street's help to sell the new stocks to big institutional investors, Safeguard
chairman Warren "Pete" Musser told shareholders at the company's annual meeting Thursday. And
that means modifying Safeguard's shareholder-friendly approach to fit Wall Street's needs.
Musser expects that will translate to more deals and better prices - but also to smaller pieces of each
deal going to Safeguard shareholders. And it could prove tougher for smaller shareholders to get in
on the deals.
Big investment banks such as Merrill Lynch and BT Alex. Brown want as much of the stock as they
can get to sell to their own big clients. "In return, we get their analyst coverage," said Safeguard
attorney Steve Rosard. Without attention from key analysts, tech stocks tend to languish unbought,
he noted. "We have to play by their rules to be in the game."
Under Musser's plan, outlined at Safeguard's annual meeting Thursday, a long train of IPOs will help
create a tight group of Internet companies - many of them based in the Philadelphia area - that will
serve the online needs of U.S. corporations, much as Web companies such as America Online and
Amazon.com serve consumers.
But this speed-up means big changes for Safeguard investors. Part of Safeguard's appeal has been
the unusual way it grants "rights offerings" to individual investors, who own almost two-thirds of
Safeguard's stock, for emerging companies in which Safeguard invests.
The rights have enabled Safeguard shareholders to buy bargain-priced stock in advance of new
IPOs, enabling them, at best, to multiply their money many times over as companies such as Novell,
Cambridge Technology Partners, and Sanchez Computer Associates of Malvern grew and
prospered.
That made Safeguard special - at a time when big profits from most initial public-stock offerings are
restricted to big Wall Street firms and their clients.
But to realize his dream of selling more and bigger stocks quickly, Musser told investors he needs to
enlist the kind of Wall Street firms that have the most to lose from Safeguard's shareholder-friendly
policies.
Musser and his lieutenants told the crowd they planned to replace Safeguard's "rights offerings" with
a "directed share subscription plan" that would have the effect of restricting the size and timing of
Safeguard shareholders' future IPO investments.
That's still better than most investors can do on their own, Musser added. "The average individual
investor can't do it," he said. "We're paving the way for all of us to buy IPOs at the IPO price."
Initial reaction was guarded. On Friday, Safeguard shares dropped $5.50 to close at $85.25.
Musser acknowledged that many of Safeguard's 35,000 investors had been attracted by the rights
plan. While shareholders at the meeting questioned Musser respectfully and applauded repeatedly,
he said he has received letters accusing him of "forgetting my roots" - or worse.
Still, Musser's recent Internet focus has won Safeguard unprecedented attention.
When Musser began his talk as the stock market closed Thursday, Safeguard's stock price was up
500 percent for the past seven months.
"Warren Musser has beaten [legendary investor] Warren Buffett in the 1990s," said Musser's new
second-in-command, Harry Wallaesa; he also noted, smiling, that Safeguard has outperformed tech
giants Microsoft and Intel in recent months - or, for that matter, over the past five years.
In January, Safeguard began, as Musser puts it, "declaring ourselves an Internet company" on
financial news programs and at brokerage technology conferences. He said Internet stocks now
account for 60 percent of Safeguard's investments.
Initial returns have been promising. In February, a Safeguard-affiliated company, Horsham-based
VerticalNet, which runs Web sites for industrial buyers and sellers, launched its own spectacular
IPO, which tripled in value the first day and later soared to as much as nine times its initial price.
Safeguard has another half-dozen deals in the works, with scores more under consideration. "All
these little jewels," Musser said, "are building up in the pipeline."
Indeed, in the past three weeks Safeguard has applied to the Securities and Exchange Commission
to take public two companies: Wayne-based Internet Capital Group, which owns parts of 29
additional Internet companies, and King of Prussia-based U.S. Interactive, a consulting firm.
The proposals said Safeguard investors would get a crack at the IPOs, but left blank the sections
detailing just which investors could buy how many shares.
At the Thursday meeting, which was broadcast on the Web by Safeguard-funded Vcall.com,
Musser and his aides unveiled what he admitted is a "complicated" share program that Wall Street
finds more appealing.
What will change? "The IPO process is faster" than a traditional Safeguard rights offering, so "we
had to tighten dramatically the time period" in which Safeguard investors have to send in their money,
said general counsel James Ounsworth.
Safeguard investors will likely have four days' notice - at most - to buy into Internet Capital and U.S.
Interactive when they go public this summer. That compares with the 35-day period typically granted
with the rights offerings.
In fact, many investors could have to act instantaneously. Safeguard expects it will contact investors
or their brokers through Web sites, through investors' brokers, and possibly by E-mail and
telephone. But Ounsworth's bottom-line advice was "to be there the day they make the call" - or risk
missing an IPO entirely.
To accommodate the investment banks, Safeguard shareholders will likely be able to purchase one
share in a new IPO for every 10 to 20 Safeguard shares they own, Musser said - down from one
per every five Safeguard shares during past rights offerings.
In the past, Safeguard investors who didn't want to use their stock-purchase rights could sell them.
But under the new plan, they must use them or lose them.
Musser noted that rights offerings had been granted as low as $5 to $10 per share; he and other
company officials predict most investment banks will want share subscriptions at IPO prices of at
least $10 to 15 per share.
To compensate small shareholders who might otherwise be cut out of a deal, Wallaesa said
Safeguard is trying to put together a special joint investment fund that would allow those with fewer
than 20 shares to gain some benefit from every Safeguard IPO |
