The Float Is Becoming A More Buoyant It Proposition
The Age
Tuesday August 3, 1999
THROW away trendy Internet investment doctrine, the fundamentals are making a comeback.
Over the past three years, United States investors have been brainwashed to look to the sky when it comes to expected returns. Australians have been slower to jump, but if the recent rash of proposed listings is an indication we are warming to the notion that distant generations as yet unborn may make a profit on today's investment. Maybe.
Contrasting with the blue sky ambitions of some, a new flock of stockmarket hatchlings are launching themselves, often reluctantly, with assets out of keeping with the new norm - an existing business, customers and profits.
It's a change of pace from some recent market debutants characterised by promises of heady returns on the back of little substantive history. Stags, investors who take a quick profit by selling on the first day a company is publicly listed, have abounded perhaps because the long-term business strategies of the companies they favor have been noticeably vague.
Not surprisingly many of these blue-sky companies are listing through the shells of junior Western Australian miners, hard hit by the continued fall in the gold price.
Critics, like WA ISP iiNet's director of legal affairs Kim Heitman, say punters should be wary of those rushing to market. He is also concerned all IT startups could be tarnished if expectations fail to be realised in short order. ``Sooner or later people will realise if they (listing companies) had to go through the financial probity tests they would find it hard to pass muster," Heitman said.
The Perth lawyer, who has gained a high profile through his involvement with various industry groups including Electronic Frontiers Australia, closed his practice specialising in cyber law to join iiNet last month.
He said iiNet's proposed float, which should be small at only about $40 million, will help to fund further acquisitions and issue stock to staff. There is some talk that subscribers may also get preferential treatment when it comes to issuing shares.
iiNet has been profitable almost since it started in 1993 when its co-founders, Michael Malone and Michael O'Reilly, ran it out of the games room of their home in Perth's northern beachside suburb of Padbury. Malone bought out O'Reilly last year.
Heitman and Malone will be in Melbourne tomorrow and Thursday on a hectic roadshow selling the business to institutional investors.
The ISP has a subscriber base of about 25,000, which it ambitiously plans to double in the next year, partly through acquisitions.
It is the biggest independent ISP in WA, with points of presence in rural, regional and metropolitan areas. Heitman claims to have more subscribers in that state than OzEmail.
Heitman says the impending costs of censoring the Net imposed by the Federal Government will send some smaller ISPs looking for buyers. He said iiNet will use its share scrip to acquire at least two ``big plums" - ISPs with at least 5000 members - and a dozen or more smaller players.
The acquisitions should be announced within days of the business going public, which should occur within the next two months.
Despite this iiNet is reluctant to enter the market.
``Net stocks are very sexy at the moment, but we're trying to lower expectations. Judge us like a telco - we make money. We may not be the next Microsoft but we'll make quality dividends," says Heitman.
``You could say we're at the high end of the Net bubble."
Adelaide digital and multimedia content creator Shane Yeend is cautiously looking at his options. The former television cameraman and now owner of Imagination Entertainment, which produces television shows like E! and Battle of the Sexes as well as interactive content, board games and websites, is also wary.
``You've got a lot of companies rushing to build currency (share scrip), but who wants to get lynched at their first shareholders' meeting?" Yeend asks.
``I'm building a solid company and we've proved how we can build a solid website with a solid strategy.
``It's easy to lose site of building long-term growth potential."
Yeend has just hung up the phone on a broker looking to backdoor the company through the shell of a miner; the calls have come every week for the past year. He always declines.
A year ago he was eager to list; today, he's not so sure.
He has just appointed a former banking heavyweight to the role of chief financial officer, and is about to put on a new senior management team, including a new managing director and two new board members.
The ``roller coaster ride of a lifetime", as Yeend put it, includes opening offices in Melbourne and Los Angeles, and seeking new acquisitions.
He said he could float within four months, but has no immediate plans. He can fund expansion through profits. Earlier this month he acquired another multimedia producer and absorbed its 25 staff.
He has about 65 full-time staff, but this is likely to double in short order.
He says states including Victoria are throwing ``substantial subsidies" at the business to lure it away.
Last week, Yeend settled out of court with Melbourne multimedia outfit, Sprint Software, which also hopes to list sometime soon through the shell of Richfield Resources NL.
Imagination Entertainment took Sprint to the Federal Court over alleged infringement of its Battle of the Sexes intellectual property, which Sprint developed under contract and has used extensively in its publicity.
Spokesman for Sprint Richard Jabara said the suit was settled amicably with the parties exchanging documents last week. He said it had no effect on Sprint's ambitions. But he conceded life would be easier and the share price more buoyant without the spectre of handling litigation while going to the public.
The way is also clear, Yeend says, for Imagination Entertainment to take the popular game to the world. This includes an expected 1.5 million sales of the board game in Britain alone, and marketing the website - which was for a time Australia's most popular - radio and television globally.
The market has ``gone gangbusters", he said.
``The Battle of the Sexes site is now back in house," Yeend says. ``Obviously if you're trying to sell to shareholders you have to own your own properties.
``We're looking at our options. We're out to build a solid currency if the market is right. The whole online thing is a big focus for us."
A former Perth-based maths academic, Dr Bean San Goh, plans to take to market his online brokerage Sanford Securities.
Goh formerly set up Australia's first secondary school targeted to international enrolments, WA Internal College.
He said the listing is ``not a major event", but will aid expansion.
``We want our share liquid so we can trade easily," Goh said. ``You also have a better profile."
He accepts there are some risks with going public nowbut sees bigger problems in the Federal Government's unwillingness to adopt the Internet as a trading vehicle. He is waiting anxiously to find whether Sanford can participate in another float - offering shares in Telstra 2.
Previously he has worked with several companies, including Hutchison Telecoms, as a channel for investors. ``There's increasing interest in Australian stocks, overseas," says Goh.
``You can reach millions of people through the Net in a few minutes. When it's a huge float like Hutchison you must get to people very quickly.
``We would hope the Government would allow online brokers (to participate in Telstra)."
Harvest Road, whose WebPOWER suite helps manage websites is based in Nedlands in WA. It has signed deals to distribute its product with Sun Microsystems and in May sold a million licences to Carlton Internet solutions provider, SchoolsNet. Harvest Road's founder and chief executive, Grame Barty, formed the business in 1996 before the rush with the plan to go public.
The recent frenetic activity has not crimped the enthusiasm of the telecommunications industry veteran, although he tempers it with pragmatism. Like the others, he is awaiting approval for the prospectus and should float within three months.
He says all the interest surrounding some of the WA backdoor listings does reflect negatively on the sector.
``Our solution is to front door list and we've chosen a Melbourne broker for that," he says.
``We didn't want to be confused with the dot-com miners. There's some real garbage out there.
``We wanted to take advantage of market sentiment but we wanted to do the hard yards and be held accountable. It took us longer but we don't have any confused objectives."
Barty says he is being pursued by brokers and mining companies looking to take him public. The problem is the miners and analysts know less about the Internet than the public.
``The thing I find amazing is some of the late-80s players (in the WA Inc scandal) are re-involved but the market doesn't seem concerned," Barty says.
``The market isn't concerned about long-term growth just short-term growth. There's a lot of stags out there."
Despite their reliance on existing revenues, profits and proven business plans, that's not to say these future stock ticker symbols don't have ambition.
iiNet has an application in front of Sony Computer Entertainment to become a registered developer. The business plan is to be the first in the world by the middle of next year to offer cheap and easy Net access through the upcoming Playstation II when it launches.
iiNet is also looking to provide easy access to the Internet through custom boxes running Linux, which cost a tiny fraction of the total cost of so-called ``$0 PCs".
It will also examine the possibility of becoming a fully-fledged telco following the decision this month by the Australian Competition and Consumer Commission to force open Telstra's monopoly on the local call network. The ISP may offer always-on permanent Internet connections and voice over IP telephone calls and other value-added services to its subscribers.
Imagination Entertainment is investigating world-wide Net radio licences, and has a gambling product planned. Harvest Road is expanding aggressively under the chairmanship of former Computer Power chairman George Bradbury.
Most agree there are risks of a backlash against the sector in about a year when a rash of inaugural annual general meetings of underperforming companies are held. Yet they are optimistic for the future. They agree the market will find its own equilibrium.
Barty says the smaller investor knows what they are buying into and is prepared for the long haul, even if some of the institutions get a bit skittish. ``Institutional investors don't have a clue what you're talking about but the public understand," he says. ``People who access the services understand its value. The general public are more investment aware, and they're looking for the long term."
© 1999 The Age