At first glance, it might seem like it was another disappointing week in the IPO market; less than half the scheduled offerings actually made it to the market. But a closer looks tells a different story. To be sure, the IPO market is no longer a haven to harvest massive opening-day gains. Postponements were the rule, and those that did venture out met with unenthusiastic receptions.
The one exception to this trend was Ixia, which posted a 58 percent gain in its debut on Wednesday. The IPO market loves companies within a new industry, and Ixia fit that mold. As investment in next-generation optical networks increases, Ixia's tools enable operators and component manufacturers to analyze performance features such as packet loss and transmission speed prior to purchase or installation.
Yet despite the solid performance of Ixia, the hidden value of the week may lie within the handful of offerings that failed to muster even a 10 percent gain on their opening day. With a lack of investor enthusiasm, a $5.5 billion company like Monsanto can easily get overlooked. The St. Louis-based producer of herbicides, seeds, and other genetic-related products are used for more cost-effective farming solutions. The company's 35 million-share offering priced at $20, below an originally proposed $21 to $24 range, to net the company $700 million.
TOO MUCH TOO SOON
With a history that dates back to 1901, Monsanto is hardly a newcomer. Yet with the ink barely dry on its merger with the pharmaceutical giant Pharmacia, investors may have been leery of the spin-off so soon. Although Monsanto was acquired in December 1999 for $27.3 billion, Pharmacia was not after its bio-agricultural products. Instead, Pharmacia wanted Monsanto's pharmaceutical subsidiary, G.D. Searle, which has a highly touted arthritis drug in development.
So when the deal was finally completed and approved in March, Pharmacia wanted to divest itself of the agricultural arm and retain the pharmaceutical side in one unit. As such, Pharmacia completed the spin-off IPO this week of Monsanto.
Basically it comes down to whether investors believe in the idea of agricultural biotechnology, which promises to fight disease and illness in the crop production process rather than in the doctor's office. It's essentially creating edible vaccines that allow a staple crop like corn to be altered with a drug, thereby creating a new channel for distribution of medicines. This in turn allows a drug to reach a much larger portion of the population more efficiently and effectively than through a traditional channel that requires medical professionals.
"It's the closest thing to the industrial revolution for those who believe [in agricultural biotechnology]," said Mark Edwards, managing director at Recombinant Capital, a financial consulting firm to the biotechnology and pharmaceutical industries that is based in San Francisco. Mr. Edwards says that while pharmaceutical companies currently boast earnings growth that is twice that of strictly agricultural biotechnology companies, players like Monsanto are expected to outpace the pharmaceutical firms by 10 to 50 times in the years ahead if these developments are embraced.
WHY THE FLAT STOCK PERFORMANCE?
Monsanto is currently suffering from a decline in commodities prices, which has forced farmers to cut back on their spending for some of the herbicides, according to Roger Wyse, managing director at Burrill, a private merchant bank based in San Francisco that focuses exclusively on the life sciences industry. On top of slowing demand, these products have fixed patent lives. Its main product line of herbicides, known as Roundup, went off patent protection in September. More significantly, though, Mr. Wyse points to the continued and growing backlash against products that, while helpful to humans, are falling under criticism for their impact on the environment.
While the debate over the environmental impact of using Monsanto's products is far from over, it is certainly not the type of issue that Wall Street cares to attempt to quantify. Additionally, the company carries a large amount of debt on its balance sheet, roughly $5.6 billion.
Ultimately, Mr. Edwards feels that the movement of the company from a position of independence to a subsidiary role with Pharmacia certainly didn't help the company's life science focus. But now that it is independent again, he feels that the company could be ready for a rebound. Good news for a 100-year-old company fresh off its IPO.
With offerings from a French company and an Irish company, the international markets also made some noise this week. Although the international market was well represented during the summer of this year with the likes of the Indian Web portal Rediff.com and the Chinese telecommunication provider China Unicom, foreign offerings have become as nascent as their domestic counterparts.
TRACKING SUCCESS
Alcatel, a French telecommunications equipment provider that operates in 130 countries worldwide, raised $1.2 billion when the tracking stock for its Optronics unit hit the market on Friday. Trading both on the U.S. Nasdaq as American Depository Receipts (ADRs) and on its local market, Optronics is a top European producer of laser filters and related parts for fiber-optic networks.
The ADRs priced at the low end of Optronics's loft price range of $71.40 to $84 at $71.95 a share but opened on weak demand at $69. The offering represents the first tracking stock issued as an ADR and the first one from a French company. Although U.S. tracking stocks such as Sprint PCS and AT & T Wireless have not performed well as of late, Alcatel hopes that investors' demand for optical companies will drive the stock price regardless of the limits inherent in a tracking stock.
The other international offering was from Datalex, a Dublin, Ireland-based provider of e-business solutions for the global travel industry. Like Alcatel's offering, the 13.4 million-share offering from Datalex priced below its price range of $12.50 to $14.50 at $11.50 and opened only slightly higher at $11.56.
Given increased demand by consumers for online travel planning services, Datalex could be well positioned to benefit from the technological needs of the new travel sites popping up -- especially as Priceline.com's command over the U.S. markets begins to waver. Datalex currently serves as the backbone IT solutions for such leading carriers as Aer Lingus, America Airlines, British Airways, and Singapore Airlines.
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