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IPO Story
Archipelago IPO: Several Apparent Conflicts Jeffrey R. Hirschkorn, Senior IPO Analyst, Aug. 9, 2004 The market for IPOs has certainly come under intense pressure with the recent malaise on Wall Street. Only a handful of deals have made it out of the starting gate and included the recent float from Navteq (NVT), the online mapping concern owned by Philips Consumer Electronics. What was more surprising with the Navteq IPO? Despite the recent decline in new stock issuance, shares of Navteq gained 15%, after totaling proceeds north of $800 million. In a week where a slew of deals are tentatively scheduled to price, only a couple of deals have piqued our interest. Analysis contained herein focuses on the potential initial public offering from the first open all ECN network � Archipelago Holdings (proposed: AX). This IPO is also different than the normal because shares of Archipelago, which was formed in late 1996, will list on the Pacific Stock Exchange for trading on the Archipelago Exchange or ArcaEx. Structure for the IPO anticipates the sale of 11 million shares at talk of $13.25-$15.25 through joint lead managers Goldman Sachs and JP Morgan Securities. Co-managers on the offering include Banc of America Securities, Credit Suisse First Boston, Lehman Brothers, Merrill Lynch and Piper Jaffray. Owing to an apparent conflict of interest from a majority of investment banks, Piper Jaffray has been named a qualified independent underwriter. Proceeds from the IPO have been slated for general corporate purposes, including providing additional funds for its operations and the ability to expand and diversify its product and service offerings. The company will not receive any monies from shares sold by selling stockholders. Of the 5.5 million shares being offered by holders, nearly 4.2 million will be offered by affiliates of the firm�s underwriting team � except for Piper Jaffray. Piper Jaffray is not an investor in the firm. Archipelago, through an alliance with the Pacific Stock Exchange, operates ArcaEx, the exclusive equities trading facility of PCX Equities, a subsidiary of the Pacific Stock Exchange. With ArcaEx, clients can trade over 8,000 equity securities that are listed on the New York Stock Exchange, Nasdaq, American Stock Exchange and Pacific Stock Exchange. With ArcaEx, in 2003, customers executed 295.1 million transactions in U.S. equity securities. For the first half of 2004, customers placed 200.8 million transactions through ArcaEx. The firm conducted nearly 26% of the total trading volume in Nasdaq listed securities. Revenues have steadily risen, having hit $459 million in 2003. For the first half of 2004, sales came in at $276 million. Net income briefly hit a low, having recorded losses of $22.8 million in 2001 and $21 million in 2002. In 2003, the company moved back into profitability with net income of $1.1 million. More vital: explosive profits for the first half of 2004. In that period, Archipelago reported profits of nearly $24 million. The company reports that its revenue base is derived from transaction and market data fees. Market data fees include the sale of proprietary data to content aggregators that include Bloomberg L.P. and Thomson Financial. Revenues experienced a sizeable gain in 2002. That is when Archipelago merged with REDIBook ECN. REDIBook, a competitor in the ECN market, was operated by Spear Leeds & Kellogg, a wholly owned subsidiary of Goldman Sachs, one of its own investors. There�s been some consolidation in the ECN market, with Instinet Group�s merger with Island ECN. Investors in the firm include Goldman Sachs, General Atlantic Partners, Credit Suisse First Boston, Fidelity Global Brokerage Group, Merrill Lynch, Instinet International, Pacific Exchange, JP Morgan Chase, Charles Schwab, TD Waterhouse, E*Trade Financial, National Discount Brokers, a unit of Deutsche Bank Securities, BNP Paribas, Bank of America and other major investment firms. GSP LLC and Virago Enterprises, two investment engines controlled by the firm�s trio of founders, disclaim a pre-IPO stake of 3%. The trio of founders gained fame from the creation of Townsend Analytics, a software development firm that develops technology for use in the financial-services market. Questions on this deal include: a clear apparent conflict by the underwriters and selling stockholders and deterioration of the current market environment. One last problem: most investors will have an inability to follow shares of the IPO because they will not trade on a major exchange. It is the first deal to trade only on a secondary market. Pricing is seen occurring early in the week. If all goes well, than in the coming weeks, we�re likely to see a float from The International Securities Exchange, the first electronic option exchange in the United States. Plans call for the firm to price $100 million of common shares through underwriters led by Bear Stearns and Morgan Stanley. According to recent analysis by Barron�s, the ISE �may encounter some headwinds. Chief among them is a souring environment for new stock issues. Competition also is heating up for the ISE. Its launch in 2000 was met with much skepticism and scorn.�More on Google! Today, the Internet search engine increased the size of its pending IPO to 25.7 million shares. No definitive timing has been set following a series of severe setbacks. E-mail: jeffh@currentofferings.com. |
