Internet retailer Newegg Inc.’s decision to drop its initial public offering could be the result of some rocks the City of Industry company has hit during the past two years.
Or it could be because company executives want to sell privately instead or raise money other than on the stock market.
Newegg, an online retailer that primarily sells electronics and computer parts, withdrew its IPO registration May 27, almost two years after filing a prospectus with the Securities and Exchange Commission to go public.
“At this time, we have elected to withdraw our registration statement as we continued to evaluate the full range of our various strategic options and objectives,” Lee Cheng, Newegg’s general counsel, said in a statement.
The company did not update its original registration filing since March of last year. That indicates the company wasn’t actively pursuing the IPO recently, and makes the official withdrawal something of a formality.
Since filing in September 2009, the company has dealt with two lawsuits, issued a product recall and made a change in leadership.
Those challenges likely affected Newegg’s decision, said Lloyd Greif, president and chief executive of downtown L.A. investment bank Greif & Co., but the company also could have been motivated by a number of other factors.
“Clearly something caused them to decide that a public offering wasn’t a good idea,” he said. “They could have felt that the IPO wouldn’t be successful, or they didn’t need the money.”
There are several reasons why a company would withdraw an IPO, Greif said, including declining financial performance, a change in the executive team, plans to sell or a decision to raise money privately.
Newegg’s most recent financial data, released when the company updated its IPO prospectus last year, showed revenue of $2.3 billion in 2009, up 9.5 percent from $2.1 billion in 2008. Net income for the year was $24.9 million, down from $28.8 million in 2008.
At the time it filed to go public, online retail experts praised Newegg’s diversification strategy. The company expanded its inventory beyond its core electronics business into apparel and other consumer items. It also moved into international markets such as China and Canada.
Newegg’s main competitor is e-commerce behemoth Amazon.com, a formidable force that may have given investors second thoughts. Or investors may have had doubts about the company’s narrow margins.
“There might not have been that much initial demand from institutions,” said Josef Schuster, founder of Chicago-based IPO research firm IPOX Schuster LLC. “They’re in a highly competitive marketplace and their profit margins are really razor thin.”
Newegg was a recurring leader on the Business Journal’s annual list of fastest-growing companies in many of the years since its founding in 2000.
It hoped to raise $175 million through the sale of shares. Some of the proceeds would have gone toward increasing the company’s operations in China and building a regional headquarters there.
J.P. Morgan, Bank of America Merrill Lynch and Citigroup were expected to underwrite the deal.
But the company, which has more than 2,000 employees, has dealt with some internal challenges since filing to go public.
Chief Executive Tally Liu stepped down last August after two years. Fred Chang, Newegg co-founder and chairman who served as chief executive until 2008, resumed his CEO role.
Chang told the Business Journal at the time that the company’s board decided to go in a new direction.
Newegg has also been involved in two ongoing lawsuits. Two former employees and a former consultant sued the company in February last year, alleging that it had violated labor laws. The company denied the allegations in a press release and the case is in arbitration. In August, a judge ordered the company to pay $2.5 million in damages to Chicago’s Soverain Software in a patent infringement lawsuit related to e-commerce software. The company appealed and expects a decision this year.
In March last year, Newegg inadvertently shipped counterfeit computer chips to customers. The company shipped replacements and ended its relationship with the supplier that it blamed for the error.
Cheng told the Business Journal last August that the company’s problems have been exaggerated.
The withdrawal of Newegg’s public offering goes against the growing trend of successful technology IPOs. Chicago-based Groupon announced its highly anticipated plans to go public last week and Mountain View-based LinkedIn shares triggered a frenzied demand when they were first offered last month.
But Greif said volatile market conditions could have played a role in Newegg’s decision.
“The markets are a little choppy,” he said. “You still have an uncertain economy right now.”
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