BigBand Network: No Big Deal

Cable and network switching solutions company BigBand Network Inc. (BBND) is probably just one of the technology companies to suffer the after effects of the recent financial crisis in mid-August, since the mayhem that ensued then probably led some customers to cancel or put on their orders on hold until the storm abates.

The BigBand story, however, has nothing to do at all with the financial meltdown that hit the world in the third quarter, nor does it have any connection, I feel, to the company's version of events. A drop in sales as dramatic as this does not come out of the blue. As I see it, BigBand is one big story of greed on the part of underwriters at the expense of unsuspecting investors. I can already envisage the welter of lawsuits that the company will find itself facing within a few days, and I find it hard to believe that the two banking giants that led BigBand's IPO, Merrill Lynch and Morgan Stanley, genuinely felt that the company is deserving of a $750 million value, the one at which it held its IPO.

Some years ago, I met Agis Industries CEO Moshe (Mori) Arkin and I asked him, among other things, whether he intends to list the company in New York, in addition to the offering on the Tel Aviv Stock Exchange [TASE]. He told me quite candidly, that there was no point in him making an offering in New York until he was convinced he had forward visibility for several quarters. "You know very well how they punish anyone who warns over there," he added.

As I have never invested in BigBand, I never had occasion to read the company's prospectus until yesterday. One of the strange things that stood out immediately was the fact that the last full quarter prior to the IPO was what is usually called "outstanding," but all the quarters before that were, to use the common vernacular, "no big deal," certainly not for a company whose post-IPO value climbed to $1.2 billion.

Had they asked him, Mori Arkin would have told them that you don't build an offering on one excellent quarter, which in any case was probably was a random occurrence. It goes without saying that with the IPO now complete, the fourth quarter of 2006 is now a "museum relic" and it is doubtful whether BigBand will ever repeat the ratio it showed then of net income to sales.

BigBand's employees will not get a chance in the foreseeable future to benefit from the value the company's stock soared to following the IPO, since the lock-up period for shares held by employees, management, and funds only ended two weeks ago. On the other hand, as far as I can recall, BigBand was one of the few IPOs in recent years in which senior executives, among them CEO Amir-Bassan-Eskanazi, and executive VP and CTO Ran Oz, sold hundreds thousands of shares at the issue price of $13, double their price today.

Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[Adam:]

While it amazes me that BBND is doing so poorly in a market that is both growing and dynamic, my posting is more focused around your comment regarding executives selling alongside the public offering. It is not uncommon for founders in private transactions to benefit from the sale of the company when it occurs while the employees wait for some period to expire. The logic is that when the liquidity event occurs, the founders have completed the task set for them by their initial investors and therefore its appropriate that the founders get paid. When you consider the many years effort and dedication it took the founding team at BBND to get to where they are today, and the financial sacrifices startup executives make compared to operating company executives, I believe it is very reasonable to allow founders to sell alongside the public offering. They are simply being paid for their historical effort. (think of it as backpay)

In terms of the IPO, investors invested in both the market and the company, BBND. The market opportunity should be the primary focus of the investor followed by BBND's ability to successfully grown their share of that market. As such, investing because of a single quarter that BBND stated was "outstanding" is based on incomplete analysis and seems unwise. Of course, the current stock price is representative of the management teams ability to compete in their market, and the market measures this performance in a very dispassionate way.

Adam

2007 Oct 09 01:45 PM