Cult of IPOs
Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Not every animation and visual-effects company can be the next Disney Pixar but surely there is room for smaller players. Unfortunately, one such participant, a company called Digital Domain Media Group, filed for Chapter 11 bankruptcy protection earlier this week after gracing the public markets for less than a year. Digital Domain is being scooped up by private equity firm Searchlight Capital Partners for $15 million, but its short legacy reverberates through the halls of IPO contenders everywhere.
The media company had problems managing its cash flow, choosing to acquire animation and educational brands; all the while losing sight of its core operations, according to The Wall Street Journal. In a flash, these mistakes cost the company behind the special effects for blockbuster movies, including Titanic, have cost Digital Domain its balance sheet and its status as a publicly traded company.
The culture of IPOs is different in 2012. Wall Street's most widely anticipated debut of Internet powerhouse Facebook couldn't happen without a major technology glitch that left an asterisk on the trading day and worse was a harbinger for the type of post-IPO activity the stock was in for. Hopefully that's all behind Facebook, Mark Zuckerberg, and investors.
But as the IPO pipeline is once again filling up and it's the smaller names, the Digital Domains of the world, that are cause for concern.
In a Dodd-Frank world, which has some corporate executives and certainly investment managers griping, it is surprising to see public policy that paves the road to new offering in the public markets a little smoother. Indeed, the Jumpstart Our Business Startups (JOBS) Act does just that. It allows emerging companies to test the IPO waters. The problem is once companies like Digital Domain realize those waters are a bit too deep they get out, leaving investors to pick up the pieces. The policy has good intentions and is designed to help companies grow and stimulate jobs growth. It allows emerging companies with under $1 billion in total annual revenues to begin trading in the public markets.
One of the companies that was privileged to IPO because of the JOBS Act includes Kayak Software (NASDAQ: KYAK), according to the WSJ. The company's original S-1 filing came in 2010 but it wasn't until June of this year that investors could purchase KYAK shares. And purchase they did on the first day but shares have pulled back about 10% since the IPO.
Steve Hafner, CEO of Kayak, recently told Bloomberg that despite disappointing market debuts from the company's technology counterparts Kayak entered the markets at the right time and at the right price. He also emphasized that the company is here for the long haul, and as a result asked investors to do the same. He advised investors to take a long-term approach to the stock rather than responding to daily trading activity or even quarterly earnings.
Kayak is profitable and generated revenues of $76.9 million in its 2Q. It continues to attract new eyeballs and revenues from its mobile demographic are trending higher.
With only one-fifth of its business exposed to Europe, Kayak seems positioned for growth but not without some challenges. In addition to the obvious players like global online travel behemoth Expedia (NASDAQ: EXPE), which has a 15-year history and deep bench of service providers for consumers to draw from including 150,000 hotels and 100 plus airlines. The dividend-paying stock is currently trading at about 7% below its 52 week-high.
Expedia is attempting to strengthen its leading market position by capitalizing on domestic and international small business travel - a $260 billion market in 2012, according to CNBC. Last week, Expedia partnered with the Chase's Ink from Chase credit card portfolio to launch a rewards program designed specifically for small businesses. It offers small businesses savings and other perks for booking airfare and hotel stays with the Expedia.
Neither Kayak nor Expedia appear phased by a tangled web of airfare wars being spun by certain airlines.
In a more surprising twist, the online travel industry is not lost on Google (NASDAQ: GOOG), which acquired travel software company ITA in 2011 and bought the Frommer's travel guide brand only last month. Frommer's fits in neatly with Google's consumer-review portfolio, which extends to include the Zagat Food Guide from a 2011 Google acquisition.
The online giant paid John Wiley & Sons, Frommer's previous owners, some $25 million for that business, according to The Wall Street Journal. This recent wave of acquisitions strays from Google's roots as a search engine. It opens up the door, however, to greater advertising dollars in the online travel arena, where Google can leverage its search-engine prowess with ad sales - no doubt much to the chagrin of other online travel providers.
Incidentally, the Frommer's brand remains in partnership with Kayak.
What happened to Digital Domain Media Group is disappointing. And the JOBS Act certainly places a greater onus on investors to examine smaller new issues. It remains to be seen what Searchlight will do with Digital Domain - maybe it will eventually sell the business to another buyout shop. Private equity firms are increasingly looking to one another for their exit strategies, according to an article in the WSJ that points that in 2012 buyout firms have more than doubled the pace at which they swap target companies amongst their peers. Or perhaps the media company might ever get a second chance to make an impression on Wall Street.
GerelynT has no positions in the stocks mentioned above. The Motley Fool owns shares of Google. Motley Fool newsletter services recommend Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
