« February 2006 | Main | April 2006 »
March 27, 2006
AIM for the Stars (of Tomorrow)
It doesn't seem that long ago when life for an emerging growth company was pretty simple.
You raised a few rounds of venture financing, showed a couple quarters of profits (or at least a path to profitability) and did a $30 million IPO on NASDAQ.
That was plan "A." Doing a merger before you were public was for sissies. (Why would any "red hot" company take all the chips off the table before it ever really got in the game?) The NYSE was for companies that were larger and more mature, but barely had a pulse. IPOs were where it was at and NASDAQ was the market that had it going on.
Source: Dow Jones Venture Source
The decade of the 1990's will undoubtedly be historically viewed as the "Golden Age" for IPOs and NASDAQ. From 1991-2000, there was an average of 533 IPOs per year with 51% of all IPOs being venture backed. Interestingly, vis-a-vis today's criteria, the average IPO float was $32 million with $130 million market cap - in fact, 62% of all IPOs during the 1990's had an initial market cap below $200 million.
That was then, this is now. After the nuclear winter IPO environment between 2001 and 2003, some life emerged but it was very different than what we knew previously.
In 2004 and 2005, there was a total of 449 IPOs - about 20% lower than the average yearly number in the decade before. Only 25% of IPOs during the past two years were venture backed. The average IPOs size was over $100 million and the average market cap was approximately $365 million - only 30% had a market cap below $200 million at the time of the IPO.
A bear market that destroyed $8 trillion of market value, the disappearance of the growth investment banks and the explosion of assets under management have all contributed to an IPO environment that looks like Pride Rock after Scar took over.
However, the biggest impediment to a robust US IPO market is excessively burdensome regulation for US listed management teams with an exclamation point provided by Sarbanes-Oxley (See "SOX Sucks").
For example, SOX compliance can easily cost $2 million for a small, emerging growth company. That's real money that could be used for more engineers, more salespeople, more research people, and more investments in things that actually contribute to creating value for the business and its shareholders.
If you put a 30x P/E multiple on a high growth company, assuming it cost $2 million for SOX compliance, it results in a $60 million deduction in market value!
Chris Cox, who in our opinion is doing a great job at the SEC, is evaluating ways to provide SOX relief for smaller companies. This is critical, but it's too late.
Problems create opportunities and in the backdrop of a strangled US IPO market has emerged the AIM market in London (Alternative Investment Market).
The AIM was created in 1995 as a secondary market of the London Stock Exchange to serve small and mid-size companies. For the first 5 years the AIM was relatively obscure with a total of 552 IPOs from 1995-1999.
With the disappearance of the US market as the first choice for an emerging company wishing to go public and the creation of the toxic SOX, AIM popularity has exploded since 2000 - 1650 companies went public on AIM from 2000-2005, with 519 IPOs in 2005 alone. Last year, over $10 billion was raised on AIM for IPOs with average float of approximately $20 million.
The total market value for AIM is approximately $100 billion, less than the market value of Google, but it's rising quickly, having appreciated 78% over the past 12 months.
Besides escaping SOX and other choking US regulations, AIM gives listing companies other benefits as well. In general, it takes 12-16 weeks to get listed on AIM as opposed to the typical 4-6 months in the US. Listing fees are 1/3 or less of what they are on the NYSE or NASDAQ.
Reporting requirements are 2x a year as opposed to 4x, and shareholders aren't required to approve most actions.
Probably the most compelling feature for emerging growth companies is that they are core to the AIM market - much like they were to NASDAQ in the days gone by. Today, as much as many of us remain sentimental about NASDAQ as our first love, NASDAQ has grown up and is more similar to the NYSE than different from it. On AIM, emerging companies are the stars of a market created just for them.
Given the looser requirements and fledging nature of many of the businesses on AIM, cynics might chortle that the investors you're likely to find on AIM would be similar to customers you find in casinos. In fact, AIM participants read like a Who's Who of global growth investing. Fidelity is the largest investor. Artemis, Schroder, Foreign & Colonial, Merrill Lynch, Invesco, and Goldman Sachs are all key AIM investors.
Last year, IPOs backed by European VCs were about 50% greater than IPOs backed by US VC's (61 vs. 40). Given the ever increasing global nature of markets, London's rise as the center of global investing and AIM's growing role as the market for the stars of tomorrow, we would expect growing momentum for US venture-backed companies to find their way to AIM for an IPO. It's where the world is heading and it's difficult for the US markets to get the toothpaste back into the tube.
Stocks for the week were mixed with small cap stocks once again leading the pack. For the week, the small cap S&P 600 was up 1.3%, NASDAQ was up 0.3% and the benchmark S&P 500 was off 0.3%. Oil prices and bond yields were the influencers on market moves.
Advancers and decliners were equally split on the NYSE and advancers beat decliners by 9 to 7 on NASDAQ. Companies making new highs versus new lows was 837 to 172.
Contrary to the last 36 month's trend, outflows were $1.7 million from mutual funds last week. Year to date, inflows into equity mutual funds have been $34.52 billion.
Our outlook on the market remains unchanged and bullish. Valuations are good, fundamentals are attractive and supply/demand remains positive for stocks.
Posted by Michael T. Moe at 10:02 AM | Comments (0)
ThinkEquity Partners LLC Consumer Investment Banking Industry Snapshot
Included in the March 2006 ThinkConsumer you will find: (1) Valuation and Operating Statistics of various companies in multiple consumer sectors, including Department Stores, Beverage, Apparel, Restaurants, Discount & Specialty Retailers, Online Retailers and Consumer Goods; (2) Recent IPOs, Follow-ons and PIPES; (3) Recent M&A Activity; and (4) Price Performance of Selected Indices.
We hope you find this newsletter to be interesting and informative.
Posted by Michael T. Moe at 09:52 AM | Comments (0)
March 20, 2006
Healthy, Wealthy and Wise
In 1900, fewer than 5,000 households in the United States were millionaires - today there are over 8 million. There are 793 billionaires in the world, 371 live in the United States alone, up from 349 in 2005.
In 1900, a male born in the United States had a life expectancy of 48 years. Today, it's 76 years - effectively double the life expectancy of a male born in 1850, or 38 years.
In 1900, just 13% of the United States population had high school degrees and only 3% had college degrees. 38% of all jobs were farming-related. In 2005, 85% of US adults had a high school degree and 24% had a college degree.
| Then v. Now | ||
|---|---|---|
| 1900 | 2005 | |
| # of Million Dollar Households | < 5,000 | 8 million |
| # of Billion Dollar Households | 0 | 349 |
| Male Life Expectancy | 48 | 76 |
| % of US Population with a High School Diploma | 13% | 85% |
| % of US Population with a College Degree | 3% | 24% |
| % of US Jobs in Farming | 38% | < 2% |
| Source: US Census Bureau; Forbes | ||
With a population that's getting older, is more affluent and more knowledgeable as a nation, there will be booming opportunities of service and product companies that help people feel younger.
Fitness centers and spas, personal trainers and nutritionists, plastic surgeons, the convergence of holistic medicine with people wishing to feel younger and live longer, all benefit from this theme. Chinese Traditional Medicine (CTM) - using natural ingredients and thousands of years of knowledge is experiencing growth. 16.5 million people practice yoga in the United States, up 43% since 2002, according to the Yoga Journal. Time magazine reported that 10 million American adults meditate daily, up 100% in ten years.
A society that is growing in its affluence needs tailored financial services such as wealth management, tax planning and money management. Family offices, historically only realistic for the Rockefellers and Gettys, will be made available for a growing part of the population.
People living longer and getting richer, and globalization making the earth a smaller place, will enable travel services to flourish. Cruise ships providing entertainment and knowledge exploration, specialty travel providers such as Backroads, which will provide a unique travel experience, together all are on-trend. Boutique hotels such as Kimpton and high-end branded hotels like The Four Seasons (NYSE: FS, $50.84 - Not Rated), which makes travelers feel more at home, benefit as well.
Historically, what was thought as normal would be a person graduating from college, and working for an employer until retirement at age 65. Today, the average person coming out of college will have 12 different employers before they retire. It is typical for someone retiring today to live another 20 to 30 years after retirement. What happens when people routinely live to be 100? No longer can a person graduate from school and "drive off" to life - they will need to continue to fill up their knowledge tank throughout their career to stay relevant in the job. A growing trend will be retiring in your 70's (or later!) Lifelong learning will be a core fundamental to anybody in business in the future. Continuing education will be part of this, but learning new skills and adapting to a global marketplace in a knowledge-based economy will be critical to survive and thrive.
Online learning and training providers will continue to enjoy tremendous growth. Conferences and knowledge networks will be integrated into workers ongoing job program.
Benign inflation data, a drop in oil prices and some signs of life led to the best week for the S & P 500 since the first week of the year. For the week, the S & P 500 was up 2.0%, the Dow advanced 1.8% and the NASDAQ was up 2.0%. We remain very optimistic for the market overall and in particular for growth stocks. Earnings growth for companies is good, interest and inflation are low, demand remains strong for equities with a whopping $6.9 billion of inflows into equity funds last week and valuations remain attractive.
Posted by Michael T. Moe at 09:47 AM | Comments (0)
March 13, 2006
Bye Bye Dubai
Last Thursday, Republicans and Democrats alike soundly defeated a deal which would transfer control of several US ports to DP World, a Dubai-owned company. Despite support from President Bush on the grounds that the deal would send a favorable message to US allies, the House Appropriations Committee voted to bar DP World from holding leases or contracts at any US port by a 62-2 margin.
Is turning over security to a US port operator a smart thing or a dumb thing? One thing for sure: it’s a political thing. Despite the groundswell of bipartisan support to quash the deal, investors in the US market clearly were spooked by the witch hunt, evidenced by the market dropping off a cliff on Thursday afternoon after this announcement.
Despite near-term hysteria fueled by political rhetoric, the indisputable fact is that the Megatrend of Globalization is alive and well. This trend has been impacting business since Christopher Columbus set off for a shorter route to India and ended up in the Bahamas.
Technology has been the major accelerator of this trend, with the telephone, the airplane, and the Internet playing major roles in making the world smaller and flatter.
Tom Friedman, New York Times columnist and globalization spokesperson brilliantly laid out his view on the future impact of globalization in The World is Flat. Through cheap technology, abundant bandwidth, and the continuation of the globalization Megatrend, Bangalore is effectively a suburb of Boston.
The 10 “Flatteners” that Friedman cites as the major influencers for globalization are:
1) 11/9 (the reverse of 9/11). On November 9, 1989, the Berlin Wall came down. Perhaps the greatest legacy of Ronald Reagan’s presidency is when he stood outside the Berlin Wall and shouted, “Mr. Gorbachev, Tear down this wall,” and of course as it did, communism collapsed, free enterprise and markets became the economic metrics for the world.
2) Netscape went public on August 9, 1995. And with that, the world became your oyster with the click of a mouse.
3) Development of workflow software. With it, time and geography become irrelevant.
4) Apache Server is created. The result was the acceleration of Web site design.
5) Y2K outsourcing. Showed the world (through necessity) how India could be used for reliable outsourcing.
6) Offshoring. China became the hub for multinational manufacturing and assembly work.
7) Supply Chain. Wal-Mart (NYSE: WMT, $45.33, Accumulate – Price Target: $58) is the poster child for how this works.
8) Insourcing. This is in-house job sharing. UPS leads the way here.
9) Web Search Engines. It is frightening what Google finds at lightning speeds.
10) Steroids. Technology such as VoIP and Mobile phones that integrate us faster, cheaper, and all the time.
Investors such as John Templeton have shown the importance of thinking globally for investment opportunities. Looking to the future, being a global investor will be a redundant term – to be an investor you will have to think globally.
What the Megatrend of globalization really means from our perspective of identifying the “Stars of Tomorrow” is to analyze how globalization helps or hurts a business opportunity. You can’t say it doesn’t matter because globalization affects essentially everything.
Local businesses like medicine – where historically if you were injured or sick you basically had access to the physician in your community – now, x-rays can be e-mailed to the other side of the globe to be examined by an expert there.
Sourcing product from the most competitive vendor is a global exercise. Outsourcing non-core functions is done routinely, making it impossible to compete if you aren’t embracing the realities of globalization.
A “pure play” on globalization is the travel industry. In many ways, it’s easier to get from San Francisco to Shanghai than San Francisco to Des Moines. Business people I know don’t think twice about going on a 2-day trip to Singapore from San Francisco. They do think twice about a 2-day trip to Birmingham, Alabama. In 2003, the world’s airlines carried 1.7 billion passengers – 25% of the world’s population. 500 million people traveled on international flights.
Despite the airline business having been a notoriously horrible industry with the cumulative loss by all US airlines being approximately $25 billion since Orville and Wilbur Wright took wings, globalization and the demographic of aging populations makes it impossible not to be bullish on the travel industry.
As English is the global business language, another pure play on globalization is English Language training. China, always looking ahead, has made English classes mandatory starting in the 2nd grade. Berlitz is an idea with that theme. Pearson and Thomson are two terrific global media companies that have sizeable English language businesses.
Identification technology such as biometrics is an obvious benefactor of a global world. As my driver’s license is generally sufficient identification in the United States, and my passport is acceptable abroad, in a global world where I’m traveling in multiple countries frequently and commerce is conducted without geographic boundaries, physical and virtual security will be enhanced by more infallible identification.
Capital and customers are scouring the globe 24 hours a day, 7 days a week for the best return on investment for products and services. Globalization accentuates the need for a company to have a “claim to fame” and accelerates the exposure of mediocre business models. The Megatrend of brands becomes increasingly relevant with globalization. It’s great for great businesses – it’s fatal for ordinary ones.
Globalization will continue to expand new growth markets for current and future products and services, though even more importantly, the global marketplace will serve as a means to “economize” through a combination of labor market cost advantages, production efficiencies, access to global markets as well as handling coordination of post- production, sales and services. The advantage of going and thinking globally will be an imperative to free valuable resources for future growth opportunities.
It is not inconceivable that in the near future, the majority of companies will engage in R&D locally, have product components manufactured in China, then assembled in South America or Eastern Europe, then re-distributed as finished products back into the global marketplace, where local product positioning, sales and advertising are tailored for the local-global marketplace.
In the after market, customer service will be handled in India, with product issues sent back up through the supply chain; fixes handled by global product engineers and identified enhancements incorporated into to the continual R&D process occurring back at the original R&D center.
Not only do I see “globalization” as opening up new end-markets to businesses, but also new markets for essentially every business function that was once performed “in house.” The result is greater capture of global cost advantage and bringing market forces to business functions that were once “protected” inside of organizations.
Markets last week were mixed, the DOW up 0.5%, the S&P off 0.4% and the NASDAQ off 1.8%. The DOW moved up smartly, driven mainly by reports that critically ill General Motors (NYSE: GM, $21.42, Not Rated) may have solved part of its unit’s healthcare obligations. Conversely, a very healthy Google negatively impacted the NASDAQ as investors continue to pounce on every blemish found or imagined.
Advancers trail decliners by nearly a 2 to 1 ratio and the ratio of companies making new highs to new lows was a positive 2 to 1. Equity fund inflows were $951 million as well. We remain bullish on the outlook for equities, driven by fundamentals and valuations.
Posted by Michael T. Moe at 11:20 AM | Comments (0)