NEW YORK-To avoid falling into “microcap hell,” companies play a “gorilla game” of amassing size, but going public may not be the best way to get there, said Eric Gebaide, a principal of Broadview, Fort Lee, N.J.
Major technology market indexes are skewed because of their domination by a handful of companies with large market capitalization, like Microsoft Corp., Oracle and Intel Corp.
“If you’re bigger, you’re better because you get more analysts’ coverage. Once you drop into microcap hell, everything goes away,” he said in a presentation entitled “New Economy Acquisition Activity-Feeding the Wireless Frenzy,” which was part of the recent Strategic Research Institute conference on “Industry Consolidations to Spur Growth.”
The status of the initial public offering as the “optimal endgame” remains a debatable point, except for companies with a unique market niche, he said.
Broadview, which specializes in mergers and acquisitions among high technology firms, counts 319 IPOs in this sector since 1999. Of these, at least 200 went public during the first 11 months of this year.
“More than 50 percent of these are trading below their IPO price, and that means no liquidity and no secondary offering market,” said Gebaide, who is a member of two groups within Broadview, e-Media and Web Services and Enterprise and e-Business Software.
Among players in the so-called “new, new economy” 172 Web services firms have gone public since 1995 and remained independent. Of these, 75 percent have stock trading below its initial offering price.
“In the IPO markets, bankers converge on a hot area. In the Internet space, the time frame from hot to crap has been more compressed than usual,” he said.
“That is no surprise to us because of the time in their life cycles these companies have gone public.”
Even amid a hot IPO market, merger and acquisition activity has also been brisk in the high-technology area, with 545 transactions worth more than $50 million during the first nine months of last year. By contrast, only 208 such deals occurred in 1999.
Analysts at Broadview are in the midst of a debate over whether wireless data is a new platform, which would represent a significant shift, or just a new device that happens to be mobile instead of stationary. At this point, the internal consensus is leaning toward the platform shift thesis, accompanied by the uncertainty of outcomes inherent in this early development phase.
“The global wireless Internet dynamics are supposed to be where it’s at. I was at a conference where a Motorola guy scrolled through 15 screens showing how a mobile phone can be used to check inventory. That’s nowhere,” Gebaide said.
“We see clip-on devices that will allow phones to have Palm-like functions. People want so much functionality in a single device that the device can’t do anything well.”
Except for Lucent Technologies Inc., Gebaide said he doesn’t believe many of the established telecommunications carriers or equipment makers have proven sufficiently innovative.
“There are 15 little guys, like i3 Mobile and GoAmerica, all with less than $10 million in annual revenues, that should become a knowledge repository in this nascent stage of the wireless Internet. There will be strategic consolidation for product expansion.”
“Dial 1-800-TELLME and you’ll get a really cool voice browser. Integrating this into the wireless Internet, getting better security, developing smart card-level applications, all are important.”
A company like Cisco Systems Inc., which has been on a buying binge, has been notably aggressive in the use of acquisitions as a substitute for internal research and development, he added.
In Europe, old line media companies have recognized their inability to make the transition through more than one generation of new technology. To keep pace, they are actively acquiring new media companies.
“Third-generation wireless will allow for better data interchange, but 3G licenses are the bane of every European bank. Investors are saying we’re not going to get screwed the way we did in the (wireline) Internet, so they are more focused on how to make money than on the rush to get eyeballs,” Gebaide said.
“Western Europe is a generation ahead of the United States. Unfortunately, they have to get ARPU (average revenue per unit) to the point where it pays the $10,000 per month needed to pay for the 3G licenses. So you have to ask, `Who’s dumber, the carriers or the Internet guys?'”
Internet service providers may well be the ones who laugh last and best, in Gebaide’s view.
“The established content providers like Yahoo! and AOL are better positioned for delivery than the carriers. We’ll see disintermediation of these carriers before too long.”
