Growth IPOs, Mergers, Acquisitions and Consolidations

Since January 2009, several companies have filed and gone public setting the stage for accelerated niche sector growth investments including;

Solarwinds is set this week for its IPO - a maker of network-monitoring software in Austin, Texas, that was founded in 1998 and has a steady history of operating and net profit over the past five years.

Solarwinds' pitch is that its software is "easy to use." In the business software market that means the company is targeting network administrators who don't like to roll up their sleeves too much. Other open-source alternatives like GroundWork OpenSource Inc., backed by SAP AG (SAP) also offer cost effective technologies for monitoring networks.

At the end of 2007, Solarwinds had 50,000 customers in small and mid-sized businesses, including 350 of the Fortune 500. But it also has more than a million free users who download free tools that Solarwinds offers to administrators, as well as an online community that can foster goodwill and generate leads.

Solarwinds has been growing quickly, although like many start-ups, its costs have been growing even faster. Between 2003 and 2007, revenue more than quadrupled, while operating profit rose only two-and-a-half times. As a result, operating margins have declined from 88% in 2003 to 58% last year.

Even so, a company fueling its growth by hiring new staff and still delivering a 50% profit margin isn't bad. Salesforce.com Inc. (CRM) (whose president sits on Solarwinds' board) had an operating margin last year of 3%. Last year, Solarwinds' revenue grew 61% to $61.7 million, well above the 37% rate for 2006. Meanwhile, operating profit grew 21% to $30.9 million in 2007, compared to the 11% growth in profit the year before.

Most of the increase in operating costs came from sales and marketing spending, which rose to $12.9 million from $3.5 million a year earlier: New sales staff and sales commissions and online efforts to generate new customer leads. Solarwinds also established a European beachhead by opening up a sales and support center in Cork, Ireland.

Research and development costs for Solarwinds more than doubled last year to $5.9 million from $2.3 million, partly as a result of contracts with software developers in Eastern Europe. The company says these costs will remain high this year and next as it opens its own offshore development center, an investment that may not deliver significant benefits until 2009.

Other recent IPO activity includes; Rosetta Stone (RST), Bridgepoint Education (BPI), Changyou.com (CYOU) and Mead Johnson Nutritional (MJN) all rose 20%.

Digital Global (DGI) based in Longmont, Colo., a successful IPO that stands to benefit from the stated goal of the Obama administration to increase the government's reliance on satellite imaging for intelligence gathering.

Digital Global has some competition, but not much. The most prominent company that plays in the outer-space imaging space is Geo Eye (GEOY), whose shares closed Friday at $22.53. GeoEye has boomed this year, up 42% year-to-date, though the shares have recently inched back from their 52-week high of 29.

OpenTable Inc., a San Francisco-based online restaurant reservation service, also set terms for this week’s planned initial public offering. About 48 percent of the shares are being sold by existing shareholders.

OpenTable, whose IPO will be underwritten by Merrill Lynch & Co., plans to sell 3 million shares at a price of between $12 and $14 each and expects net proceeds of about $16.1 million, according to a regulatory filing.

For the years ended December 31, 2007 and 2008, OpenTable's revenues were $41.1 million and $55.8 million respectively. OpenTable offered reservations at 9,709 restaurants worldwide, 8,788 of which were in North America It seated 25.5 million diners the first nine months of last year, up 45 percent. It employed 292 people, and had $17.4 million in cash. I have a feeling any IPO money will go towards international expansion.

Verizon (VZ) has reached a deal to shed its traditional telephone line business in Michigan and 13 other states in a deal worth $8.6 billion. Frontier Communications Corp. (FTR), based in Stamford, Conn., will be taking over the Verizon Communications assets in a stock deal. The deal gives Frontier 4.8 million access lines to residential and small business customers and narrows Verizon's focus on wireless, broadband and Internet service.

The deal includes all of Verizon's wireline assets in Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon, South Carolina, Washington, West Virginia and Wisconsin as well as some assets in California. Verizon has refocused completely on wireless networks including its recent announcement to offer Hewlett-Packard (HPQ) and ACER mobile net-books.

Novatel Wireless (NVTL) just announced it will release the MiFi, a portable wireless router that will deliver wireless 3G data network access to multiple users in a small area. Much the same size as a credit card, the sleek looking MiFi will let users select access to EVDO or HSPA high speed data networks.

This "cloud" of high-speed Internet connectivity that MiFi offers can be shared not only between users, but between devices such as laptops, cameras, gaming devices and multimedia players. Perfect for business or carpooling and relieving boredom in the back seat during that long road trip with kids - think Nintendo DS (NTDOY.PK) or Sony PSP (SNE) - the MiFi will support up to five users simultaneously.

Tuesday, Nasdaq president Magnus Bocker announced that among the pending initial public offerings (IPOs) coming up in the next few months are a host of financial firms. After a wave of forced takeovers and earning writedowns last year, financial institutions are now looking to divest different areas of their businesses for maximum profitability, he said.

IPOs of big banking subsidiaries are the next logical extension of that trend. Nasdaq’s Bocker is right to focus his attention towards listing financial firms. Apart from online broker E*Trade Financial (ETFC), the only banks and brokers listed on the Nasdaq right now are much smaller regional companies such as Fifth Third Bancorp (FITB) and North Trust (NTRS). To Nasdaq’s frustration, there haven’t been that many financial IPOs around. In the past, NYSE-listed goliaths such as Morgan Stanley (MS) and Goldman Sachs (GS) have dominated any potential market share for start-ups.

Over the next 18-months, we will see investment bright spots in continued IPO, M&A and consolidations throughout niche sectors including; Software as a Service - SaaS, wireless mobile, healthcare, financial, mobile e-learning, e-book, distance learning, clean technology, sustainable energy, and bio-fuel markets.