Business Blog: Hoover’s Business Insight Zone

If you’d like to see a summary of IPO activity for the quarter just ended, check out our IPO Scorecard. We have lots of informative summaries, including

• Best/Worst Returns
• Biggest First Days
• Happy CEOs
• Money Left on the Table

Do enjoy — and please feel free to offer any comments here.

Context: This New York Times DealBook item.

Brace yourself for what? Two things:

1. The competitive ambitions of Citadel’s chief, Kenneth Griffin. They are outsized.

2. The breathlessness of the business media in covering Citadel. My prediction: you will come to think that Citadel invented sliced bread, air conditioning, and the game of basketball, and that they can create money by sheer force of will. (If you don’t believe me, just cast your mind back to the coverage of Blackstone’s IPO . . .)

As I’ve said before, all companies can benefit from good timing when entering the IPO market, but some companies — the Googles of the world — can make their own IPO market.  My sense is that Citadel rests nicely in that latter category.

In this item at greentechmedia . . .

Q2: $1.7B in cleantech IPOs

. . . green-technology venture capitalist Rob Day gives details about the slew of green-tech IPOs that hit the market during the second quarter of 2007, along with information about other venture capital activity in the sector. The nugget: while VC investment in the sector (i.e. when the VCs pony up their money) was flat during the quarter, IPOs (i.e. when VCs cash out on their investments) was way up.

It’s good information, but I think Day misses a key point — or at least, he doesn’t talk about something I would have expected him to, namely that Q2 was a great time for companies to make IPOs generally. Our own IPO Scorecard for the quarter shows a broad increase in IPOs across the board. Although my judgment on this is tinged by hindsight, it was pretty clear in the middle of Q2 that it was a fine time to win a high IPO valuation.

VCs are smart, and they want to get the best valuations they can for their companies. If you’re backing something as sexy as Google or Facebook, you can pretty much pick your own timing, because the appeal of the new stock will more or less make its own market. But if you’re backing Solid Little-Known Company X, you’re better served to get in the pool when the water’s already warm — as it was during Q2.

The Epicurean Dealmaker offers this (mildly-PG13) take on the declining share price of Blackstone in the months since its hyperventilative IPO:

Unlike the typical public company CEO, PE guys are almost completely uninvested, emotionally and intellectually, in their companies’ stock prices. In fact, many of them take an almost perverse pleasure in top-ticking the market when they take a portfolio company public. [...]

But in the case of Blackstone itself, the inside shareholders are subject to a completely different—and, for most of them, a completely unfamiliar—dynamic. They are shareholders, and large, locked-up, unvested shareholders at that, completely at the mercy of the Great Unwashed Investing Public they have been used to making such liberal fun of in their investment committee meetings over the past several years. If they buy the Private Equity Council party line—which virtually all of them do—they believe wholeheartedly that private equity is an investment method which produces long-term value appreciation, almost regardless of fluctuations in the public equity and fixed income markets. But now they can see a real-time, tick-by-tick appraisal of the value of their own business by Mr. Market every trading day, which translates into a real-time update on each Blackstone professional’s personal net worth.

This is just another example of the ways in which personal biases — in this case, the biases of the private equity folks — enter so heavily into what are theoretically — but only theoretically — purely rational economic decisions.

I’ve been meaning to talk about this company — which made its IPO filing the last week of July — but I’ve kept forgetting. Talecris Biotherapeutics‘ stock in trade is protein therapy products, which use proteins (as the name would suggest!) to treat a variety of ailments including burns, hemophilia, and immune deficiency disorders. Since its products are derived from blood plasma, the company has its own network of plasma collection centers.

Okay, so far so good — but why a $1 billion IPO? It’s not like Talecris is a marquee name.

The short answer: private equity priorities. Cerberus Capital and Ampersand Ventures paid a pretty penny for Talecris a couple of years ago when they bought the business from Bayer. As you’d expect, private equity outfits like these are nothing if not focused on how they’ll make money from a deal. So while Talecris doesn’t seem particularly special in its field, its owners have a strong vested interest in selling it while the selling is good — a window that may be closing given the overall malaise that has struck the financial markets in recent months.

The bad news for Talecris itself is that the proceeds from the IPO probably won’t do much for its ongoing business. (I’ve shared my opinions on the “wisdom” of this approach before.) Instead, the money will be used to pay off its investors and (maybe) pay down some of the debts that private equity firms always load onto their portfolio companies.

For more coverage on this IPO, check out this story from the Raleigh News & Observer:

Talecris plans IPO to raise $1 billion

For an opinionated take on what the deal means for the private equity/IPO nexus as a whole, check out David Hamilton’s take from VentureBeat:

Talecris, a Ludicrously Large IPO, and the Beginning of the End for Private Equity?

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It soared on the Hoover’s Index, it’s our Company of the Day today, and now it’s an IPO darling — what more could VMware ask for? Here are some tidbits from the NYT’s coverage:

VMware’s initial public offering raised about $1.1 billion, making it the largest I.P.O. by a technology company since Google’s in 2004. Defying a weak market, the shares closed the day at $51, or $22 higher than the offering price of $29.

The company hopes that the enthusiastic first-day reception in the stock market will also have strategic and marketing benefits. [...]

The offering is also an “über-marketing event,” [CEO] Ms. Greene said, which should widen the audience for the company’s software beyond large corporations.

It’s not hard to figure out the appeal of a profitable, growing company whose products save its users a bundle of money. Plus VMware’s market share within its niche — which might be as high as 85% — makes for a handy barrier to entry for potential competitors. For a summary on VMware and what it does, you can read my Company of the Day article, appended here for your convenience:

VMware is hardly a household name among consumers, but its IPO this week has become a focal point for high-tech investors. The company is a heavyweight in virtualization software, which allows big data centers to run more effectively by reapportioning software applications across multiple servers. This means that VMware’s customers can use less hardware to get the same amount of computing power. The company’s success in helping users save money this way appealed to EMC, the big computer storage company that bought VMware for $625 million in 2004. Given the valuation placed on VMware’s IPO, the company is worth easily ten times that much now. It’s little wonder that this offering is seen as likely the most important technology IPO of 2007.

Considering the frenzy earlier this summer for the opaque and expensive IPO of Blackstone, it’s easy to understand why investors would be excited about VMware. Founded in 1998, the company has a relatively long operating history for a software company going public. It has a powerful backer in EMC. It brought in more than $700 million in revenue in 2006, and will likely beat that number by a mile this year. VMware also enjoys a dominant position in its market, with some estimates putting its market share for virtualization software above 80%. And given that the costs of maintaining and powering servers are likely to increase, that market is likely primed to grow, especially since only a tiny fraction of all the servers that might benefit from virtualization software now employ it. Some recent IPOs, for example Orbitz Worldwide’s, seemed to go forward for their convenience of their owners rather than because the companies were actually ready to go public. But all signals for VMware suggest that it really is ready for prime time.

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The frenzy was huge. The talk was ubiquitious. The aftermath . . . was ugly.

Six weeks into its life as a publicly traded company, Blackstone Group is trading more than 20% below its IPO price of $31 per share. Congress may take a swipe at its future earnings by changing its effective tax rates. Chinese bloggers are angry about all the money the Chinese government plowed into the company when it went public. The financial world wonders if this means that private equity is on the downslope. (The answer to that question doesn’t get any rosier when we consider how much tougher it’s gotten in the past six weeks to borrow money.)

I’m hesitant to say “I told you so,” because I don’t think my analysis at the time was all that original. But what I said then, from this interim milestone of six weeks out, looks correct so far: if Steve Schwarzman figured that the time was right for Blackstone to sell a chunk of itself on the public markets, that in itself was a signal that the market was around its peak — at least, assuming that Schwarzman’s usually world-class ability to assign value to assets was accurate in this case. It would surprise me if he were very wrong about the valuation of his own company, which is why it doesn’t surprise me to find that he successfully floated it at a peak in value that could be a long time in coming again.

Travel-booking site Orbitz has a famous consumer brand but an iffy business; MF Global has a nondescript name but a deep corporate history (MF stands for “Man Financial”). Neither of them did well in early trading last week.

How badly did they do? Against an proposed offering price between $16.00 and $18.00, Orbitz shares were actually offered at $15.00, but they opened trading at $14.90 and closed the first day (Friday) at $14.50. (As I write this on Monday morning, shares are at $14.25.) When you’re talking about 34 million shares, there’s a big difference between opening at $14.90 and $16.00, much less $18.00. MF Global’s offering, likewise, took it on the chin: With a proposed offer price between $36.00 and $39.00, the actual offer price was much lower, at $30.00, and the shares opened trading on Thursday at $29.37. Shares closed trading on the first day at $27.55, and as of now they’ve gone even lower, to $26.58. In this case, we’re talking about 97 million shares. Ouch.

Why did these two issues open so weakly? We discussed the problems with the Orbitz offering here, and I think all of the reasons mentioned still stand. Orbitz has changed hands repeatedly in recent years, such that it’s very hard to get an apples-to-apples comparison of how the company’s been doing over time. And the structure of the IPO won’t much help the company make its way in the world, since the proceeds will clean up its parent company’s balance sheet, rather than financing Orbitz’s ongoing operations. Not saying there’s anything wrong with the service that Orbitz provides to consumers — but investors have voted with their dollars, and so far they’ve said that this one doesn’t excite them much.

As for MF Global, the problem here is much more interesting because it potentially runs much deeper. The consensus seems to be that the IPO flotation didn’t do well because of growing fears that financial markets are beginning to face a credit crunch. In other words, it’s going to get harder across the board to borrow money, which is far from good news for a company like MF Global, whose bread and butter comes from brokering credit and derivatives.

Two big IPOs filed last week while I was on vacation: Och-Ziff Capital Management Group (who?) and KKR (a.k.a. Kohlberg Kravis Roberts, or just Kohlberg*). Here’s the skinny on each:

Och-Ziff is an asset management firm with about $27 billion of assets under management. It’s not a household name in the industry — it serves fund managers rather than individual investors — but it pulls down more than $1 billion yearly in revenue and has a broad portfolio of investments spread across the world. For a $2 billion IPO, expect this one to be on the quiet side.

Rumors had been flying for months that KKR would follow in the footsteps of Blackstone’s historic $4 billion IPO.** The private equity business is notoriously stocked with competitive types — as in, Tiger Woods-like competitive. So no doubt the KKR folks would have liked to beat Blackstone in this regard. But these firms are also very good at copying and refining their competitors’ moneymaking ideas. In the wake of Blackstone’s offering, it doesn’t take a genius to figure out that now is a good time for a rich, highly regarded private equity firm to make a pretty penny on the public equity markets — which is precisely what KKR plans to do with its $1.25 billion offering. Mind you, KKR does have some experience in this vein, as revealed in this tidbit from Hoover’s subscription-level profile on the company:

The company is no stranger to the public equity process. In 2005 it took its real estate investment trust (REIT) unit, KKR Financial, public. The next year the company raised some $5 billion by listing its KKR Private Equity Investors fund on the Euronext stock market, a strategy that is gaining popularity among private equity firms.

Don’t be surprised if other big private equity firms (TPG, anyone?) follow suit by taking the IPO route.
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* A note on Hoover’s naming conventions: Whenever possible — and I’m going to guess this is >99% of the time — we use the legal name of the company in question, rather than the common name or trade name.  In this case, the firm that used to be called Kohlberg Kravis Roberts is now legally titled “KKR & Co. L.P. ” Henry Kravis and George Roberts still run the company as co-CEOs. The company is still often called “Kohlberg” for short, which is funny when you consider that Jerome Kohlberg left to start up his own outfit 20 years ago.

** A note on the historic-ness of private equity firms going public: To be technical, Blackstone wasn’t the first private equity company to go public.  Fortress beat them out of the gate when it had its market debut in February. But Fortress doesn’t set the tone for its industry. Blackstone does. Somewhere, Henry Kravis just flinched as I wrote that.

Many thanks to Peter Partheymuller for his typically witty posts here last week while I was away on vacation. I’m working my way back into the flow of things, so the pulse of this blog may be less steady for a couple of days. Look for more on what’s happening in the IPO market (you have seen our new IPO Scorecard, yes?), the Hoover’s Index (ditto?), and the mercenary-capitalist end of the Harry Potter empire.