Investors Split on Idealab’s Offer of Discounted Buyout

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Investors Split on Idealab’s Offer of Discounted Buyout

By CHRISTOPHER KEOUGH

Staff Reporter

Fay Ferguson, a partner at venture capitalists Kline Hawkes & Co., said he didn’t think Bill Gross’ offer was “fair or appropriate.”

Management at 24/7 Real Media, a New York-based direct marketing and advertising company specializing in new media, calculated that something was better than nothing, and took Gross up on it.

Gross, founder of Pasadena incubator Idealab, has been offering fourth-round investors a chance to cash out of the business at 10 cents on the dollar.

How many will follow 24/7 and walk away will not be clear until this week Idealab refused to talk about response until after the offer expired Jan. 18. But the decision by investors could have as much to do with their own financial situation as with Idealab’s long-term prospects.

“On the face of it, it can’t be good to sell out for 10 percent of what you put in, but it’s a sign of the times,” said Brad Jones, founding partner of Redpoint Ventures, a venture capital firm with a fund of more than $1 billion.

It’s an awkward turn of events for Gross, who founded Idealab in 1996 and has been praised as the father of the high-tech incubator. Yet his creation has launched grand failures as well as smashing successes: EToys has become the poster child of the gluttonous rise and collapse of the dot-com world, reaching a stock price of $86 before going bankrupt last year. At the same time, Overture, the former GoTo.com, is a pay-per-performance Internet search engine that achieved profitability in the third quarter of 2001.

Gross isn’t talking about what’s going on at Idealab, and his spokeswoman would only confirm that all preferred shareholders have been offered a chance to get out. Spokeswoman Teresa Bridwell said the offer of 10 cents on the dollar was made to those holding Series D, fourth round, shares. Investors in earlier rounds received different offers, but Bridwell wouldn’t say who was being offered how much.

Media firm cashes out

Bridwell said the buyout offer was spurred by 24/7 Real Media, which sold its shares back to Idealab last September. The company wrote down its initial $25 million investment in Idealab in the fourth quarter of 2000, according to filings at the Securities and Exchange Commission. In September 2001 it sold its shares, which it then valued at $1.6 million, back to Idealab for $2.5 million, or 10 percent of the initial investment. That accounting allowed 24/7 to claim a $900,000 profit on the sale.

While Kline Hawkes’ Ferguson would not comment beyond saying the offer was not fair and that the firm “will not be tendering,” he did confirm the sale in January 2000 of $80 million of Idealab stock for $40 million in cash and $40 million in Series D stock.

As part of the Series D funding round, which was Idealab’s fourth and final round and closed in March 2000, Japanese cell phone company Hikari Tsushin invested $100 million. Representatives of the company could not be reached for comment.

Other investors in the fourth round included Dell Ventures, Moore Capital Management and Clearstone Capital Partners, which last year was spun off as Idealab’s venture capital arm. Officials of Dell and Clearstone declined to comment. Moore could not be reached.

Jones said Kline Hawke’s decision to hang in or at least wait for a better valuation could bode well for Idealab because it suggests the venture capital firm believes the assets are worth more than 10 cents on the dollar.

Others say Idealab is worth at least twice as much as Gross is offering and want him to liquidate its assets and pay them back 35 cents on the dollar.

Investors angry

Bridwell said Idealab had $225 million in cash and publicly traded securities worth $139 million on Dec. 7, which was the date Gross extended the buyout offer. But she conceded that patience is running thin. “I think we definitely acknowledge that some of them are angry,” Bridwell said.

“We acknowledge that building companies is a hard business to be in, but we have good prospects,” she said, though she declined to identify those prospects. “What you’re going to see from the company is new kinds of companies that will be launching in the first half of the year with patentable technologies with high margins of profit from networking to robotics to other things.”

David Cremin, a partner at venture capital firm Zone Ventures, said whatever Gross is up to it’s bound to be a shrewd move. The secondary market of buying back or buying into investments is increasingly popular, he said.

“Bill Gross is a really smart guy,” Cremin said. “If Bill is doing that he’s got a reason for it. He’s a businessman.”

Whether Gross’ offer is fair or appropriate depends on who’s evaluating it, according to Jon Goodman, executive director of the Annenberg Incubator Project at USC

Considerations for investors include what else they could with the money, their thoughts on the future of Idealab, their desire to keep a toehold in the area of Internet business.

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