Ipos//mike1st/mark2nd
By JASON BOOTH
Staff Reporter
The no-names have entered the market.
Two L.A.-based Internet unknowns are going public in an attempt to cash in on the boom, and more are likely to follow. It’s the inevitable result of an astonishing period in which the stocks of most Internet-related companies have exploded regardless of actual financial performance leading to stepped-up activity in the IPO arena.
But what are investors buying into? The two local companies filing with the Securities and Exchange Commission for initial public offerings are Digital Lava Inc., a West Los Angeles-based software firm that specializes in digital streaming technology, and GenesisIntermedia.com Inc., a Studio City-based multimedia marketing firm.
Analysts at several securities firms that specialize in tracking high-tech IPOs said they knew little about either offering, and officials at both companies declined comment, citing quiet periods.
Besides the fact that both Digital Lava and Genesis are small, with limited track records and annual revenues of less than $20 million, analysts point out that both companies are using little-known investment banks to handle their IPOs. Digital’s underwriter is Security Capital Trading Inc. and Genesis’ underwriter is a consortium led by Millennium Financial Group Inc.
“Right now they are not on our radar screen,” said an analyst at Renaissance Capital Corp. in Greenwich, Conn. “If the underwriters were DLJ (Donaldson Lufkin & Jenrette Securites Corp.) or Merrill Lynch, we would be all over it.”
Bryant Riley, president of West L.A. brokerage B. Riley & Co., speculated that “these people are trying to fly their IPO as quickly as possible while the going is good. You have to imagine that this rally by Internet stocks is going to come to an end pretty soon.”
Last week’s market pullback illustrates the point, as did the sell-off last summer in which the Dow Jones Industrial Average fell nearly 20 percent from its peak. Nonetheless, Internet stocks have held up remarkably well during the soft periods and then have gone on to outpace the market as a whole. The Amex Internet Index now stands at just over 700, up 170 percent from its level in October.
A few local Internet companies have enjoyed incredible rides during the recent rally. Prominent among them are Ticketmaster Online-CitySearch, which went public in November, and GeoCities, which issued its IPO in August. Since their launch, both stocks are up more than 300 percent.
As with many business decisions, timing is crucial for the success of an IPO. In the next few weeks Digital will offer 1.2 million shares to the public at $15.10 a share. GenesisIntermedia.com is offering 2 million shares to the public at between $7 and $10 a share.
Like most Internet companies, Digital Lava has yet to post a profit though as a developer of software that allows desktop computers to download and play back video content, it has generated some interest.
While its 1998 results had not been released as of last week, the company posted a net loss for the year ended Dec. 31, 1997 of $4.2 million on revenues of $564,572. For the prior year, it posted a net loss of $2.4 million on no revenues.
Analysts seem more wary of GenesisIntermedia.com. Despite its name, the company’s link with the Internet is tangential, at best. Most of the 1997 revenues were generated from traditional audio and video product sales and sales through retail kiosks placed in shopping malls.
One thing Genesis has going for it is profits. For the year ended Dec. 31, 1997, it posted net income of $2.4 million on revenues of $18.2 million, up from $386,133 on revenues of $14.3 million in 1996.
“We’ve seen a real surge of interest among Internet companies in seeking IPO financing,” said John Morris, a managing director at Sutro & Co. in West Los Angeles. “People who would normally turn to venture capitalists are now turning to the public market.”
For smaller, growth companies, tapping the public capital markets provides a number of advantages, including a stock price that, given the current Internet frenzy, may never get any higher.
Issuing stock to the public also allows the company’s founders to retain more control over operations than if the business is funded by venture capitalists, who typically demand at least one seat on the board.
There are, however, serious risks of going public simply to take advantage of a market frenzy. Because Internet companies often are in the developmental phase, their financial results can be volatile. That means the company is more likely to fall short of Wall Street’s expectations, possibly causing its stock price to collapse.
“When that happens, you are dead in terms of raising fresh capital,” said Terry Bess, who manages the L.A. office of Silicon Valley Bank.
And despite the buzz surrounding Internet stocks, having “.com” tacked on the end of your name is no guarantee that investors will be lining up. “Most investors will hopefully realize that there is risk, especially the institutional investors. That’s why better-known companies like EarthLink and AOL are getting the premiums,” said Tony Hung at Torrance-based venture capital firm DynaFund Ventures.
Many of the bigger institutions are indeed skeptical at the fresh crop of offerings.
“We’re looking at a couple of e-commerce spinoffs. Are we going to invest in them? We don’t know,” said David Horwich, senior vice president for corporate finance at Van Kasper & Co. in West Los Angeles. “We’re old-fashioned guys who like to see revenue and earnings. And a lot of these guys just don’t have any.”
