A Strong Start for CommVault, Despite Distractions

Includes: CVLT, DIVX, RVBD
by: Eric Risley

Last week might have been a breakout week for technology IPO's. Three IPO's in particular received an enthusiastic welcome by Wall Street.

CommVault (NASDAQ:CVLT): CommVault has distinguished itself as a truly viable competitor in the data storage management sector, competing head-to-head with giants such as CA (NASDAQ:CA), EMC Corp (EMC) and Symantec's (NASDAQ:SYMC) Veritas line of products. Revenues over the past 12 months were $120.8mm and growth from fiscal year 2005 to 2006 (March year end) was 32%.

CommVault's competitive momentum, emerging scale and growth rate make for an impressive offering. CommVault has been incredibly patient with its IPO, actually starting the process three years ago and biding their time as their business grew and the technology IPO market began to regain its footing.

Of particular note in this deal were two rather unusual structural elements: (1) roughly 45% of the shares sold were selling shareholders and (2) a large portion of the proceeds raised by CommVault will be paid to certain preferred stock holders.

With regard to selling shareholders, it certainly makes a stronger statement (and deal) when existing shareholders are NOT sellers in an IPO. Given the choppy nature of the IPO market in general, it is a bit surprising that the Company and underwriters were comfortable with such an aggressive structure. I posit that the answer lies in the fact that the vast majority of selling shareholders were affiliates of CSFB, one of the two book managing underwriters. Clearly the market looked through this "interesting" set of facts and focused on CommVault's business and prospects. Generally, underwriters and corporate issuers strive to eliminate these types of distractions as they increase the risk of execution.

Another quite unusual "distraction" in this situation was the large cash payment ($101.8mm) being made by CommVault to satisfy obligations under the first five rounds of private financing. Typically, preferred stock issued in private financings converts to common stock upon an IPO. In this case, in addition to conversion into common stock, the holders of Series A-E preferred stock (again CSFB affiliates) were also due a preferred return and accrued dividends. This is an extremely unusual occurrence in an IPO.

So, does any of this matter to the new investors purchasing the IPO? Only if you believe that the selling shareholders see this as an opportunity to liquefy as they have a tempered view of CommVault's prospects. In this case, the CSFB affiliates have been in this investment for up to 10 years (a VERY long time) and are continuing to hold a substantial equity position in the Company. Also, very importantly, management is only selling a modest amount, signaling confidence.

Two other IPO's which priced this past week were DivX (DIVX) and Riverbed Technologies (NASDAQ:RVBD). Both were well received and traded up nicely in the aftermarket.

These transactions are encouraging and suggest that we may be seeing a more receptive marketplace for emerging vendors. Investment banker IPO activity levels are also reasonably high these days suggesting that with an open market, the technology IPO pipeline may begin to build. We'll be watching.

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