Secondary Stock Offerings Keep Questionable Techs Afloat; For some companies, finding money on Wall Street is easier than finding revenue for their businesses

SATURDAY, JANUARY 4, 2014

Secondary Stock Offerings Keep Questionable Techs Afloat

By TIERNAN RAY | MORE ARTICLES BY AUTHOR

For some companies, finding money on Wall Street is easier than finding revenue for their businesses.

Short-sellers had a rough 2013 in a surging market for stocks. Some of that is overall exuberance for the new, new thing in technology—think 3-D printing—that can sustain a stock’s momentum indefinitely. But there’s another factor that can also keep shares aloft: the willingness of capital markets to give these companies money again and again. I’ve been reviewing a decade’s worth of follow-on stock offerings by information technology companies based in the U.S.—793 deals, to be exact—which raised $77 billion for 470 companies.These secondary stock offerings, graciously compiled for me by the folks at S&P Capital IQ, run the gamut, from multibillion-dollar offerings of blue chips, such as Google‘s(ticker: GOOG) $4.2 billion secondary in September 2005, to a skein of deals by small outfits you’ve never heard of.

Some of these offerings kept precarious companies from going under. At the very least, some businesses might not have been able to subsist after their IPOs and had to tap the markets just to keep going.

Take the case of ParkerVision (PRKR), which for the past 16 years has been claiming tremendous breakthroughs in wireless technology. The company’s attempt to collect royalties through lawsuits was richly chronicled by my colleague Bill Alpert. In the long wait for that pot of gold, ParkerVision raised $83 million in 10 follow-on transactions in the past decade, while generating almost no revenue, and accumulating a deficit of $282 million as of the most recent quarter.

In ParkerVision’s case, hanging in there proved good for people who bought the stock last year, as the company in October won a long-awaited judgment against wireless-chip vendor Qualcomm (QCOM). The damages awarded, $173 million, were less than the company’s reported goal of a half-billion dollars. But the shares soared on the ruling, and are up nearly 140% in the past 12 months.

Parametric Sound (PAMT) of Poway, Calif., which owns 26 patents “to create sound in a new way,” has raised $13.6 million from follow-on offerings in the past two years, a lot more than the $768,000 in total revenue the company has taken in during that time, and about equal to the $14 million deficit it has amassed. Its shares are up 90% in the past 12 months despite a $7.7 million net loss.

The best that can be said of some of these deals is that they are public venture capital of a sort.

Universal Display (OLED), a maker of organic light-emitting diode technology for mobile devices and television, has a deal with Samsung Electronics (005930KS) that analysts say could bring in $144 million in revenue this year. Thus far, however, the main source of cash for Universal has been six secondary offerings over the past decade, worth $307 million. In the meantime, the company has amassed a $188 million deficit as of September. The stock’s up 23% in the past year. It could have a big payoff if use of its technology continues to grow, but that is anything but certain.

THE RASH OF SECONDARIES HASN’T always paid off for holders of stock. Uni-Pixel (UNXL), a maker of touchscreen technology that has been well chronicled byBarron’s (see Follow Up), raised $70 million in three follow-on deals in the last three years. Revenue has been harder to come by. Last week the CEO and COO resigned. The stock plunged; it’s down 71% since its most recent offering.

Other businesses that haven’t paid off have seen their shares surge on repeated hopes over the years as they collected multiple secondaries. Wave Systems (WAVX), a Lee, Mass.-based maker of enterprise security software, founded in 1988, has amassed a $414 million deficit, and had just $29 million in revenue in the most recent fiscal year. But that hasn’t stopped it from raising $97 million in a whopping 24 follow-on offerings since 2004. While shares are down a stunning 95% in the past decade, the stock has had brief resurgences, soaring in 2008, for instance, from a low of a dollar to over $20 by 2011, before crashing to a recent price of 91 cents.

The secondaries trend continues in earnest and, if anything, seems to be gaining momentum.

A total of 92 deals raised $17.5 billion in 2013, up from the $5.4 billion raised in 64 deals the year before. Last year was distorted just a bit by a $3.9 billion secondary forFacebook (FB), but leaving that aside, there’s clearly been a surge in investors’ appetite.

One non-U.S. company that fits the bill is Dublin-based Fleetmatics (FLTX), which says its cloud computing software can help streamline the management of trucks on the road. Fleetmatics will likely report $176 million in revenue for 2013, according to Street estimates, and perhaps $32 million in net income, but it was able to conduct three separate follow-on offerings, all in 2013, for a total haul of $786 million. Its shares are up 74% in the past 12 months.

AND THEY KEEP ON COMING. Among the companies that look poised for offerings in 2014 is E2Open (EOPN), a 10-year-old maker of supply-chain software. Analysts estimate that the company lost $24 million on revenue of $74 million in the year just ended. Through August, it had amassed a $353 million deficit. Its shares are up 67% in the past 12 months.

Another is FireEye (FEYE), the cloud-computing security vendor that went public in September in a $321 million offering. It burned through $80 million in the nine months ended September, and last week it agreed to spend $107 million to buy fellow security provider Mandiant.

Barracuda Networks (CUDA), yet another security operation, which went public in November, is another secondary candidate, given a deficit of $284 million as of the end of August and revenue of perhaps just $229 million expected in the year ending February.

THOSE WHO SEE THE GLASS half-full will argue that public markets exist precisely to get companies the capital they need to go the distance. But one can ask the larger question of whether capital has been properly allocated, or rather misallocated. Has the money yielded a proper return on investment?

Was the $83 million raised for ParkerVision worth the net deficit of $109 million after the court victory? Will Fleetmatics ever justify nearly a billion dollars raised last year?

These are questions worth bearing in mind as the next round of secondaries heads for the market.