ROAD WARRIORS
Going public is a fast-track to fame and fortune. The recent Nasdaq crash, however, has made the racecourse that much trickier.
By Steven Crane

With nerves stretched tighter than a widow's pension check, Deepak Desai grapples with an examiner from the New York Securities & Exchange Commission (SEC) over a few minor technical issues. It's 5:25pm April 12, the day before the biggest milestone in CFO Desai's career when his company, Hong Kong-based Internet content provider Asiacontent.com, goes public. If the IPO's delayed, Desai knows that months of intense roadwork will crash in flames. But SEC examiners aren't known for working late; they finish work at exactly 5:30. His heart starts beating again when the official agrees to stay an extra ten minutes to resolve the issues. At 5:40, with matters settled at last, Desai meets his colleagues and his wife, who's just flown in from Hong Kong, for a celebratory dinner.

The celebration, however, isn't quite as joyful as he'd like. Earlier in the day, the normally soft-spoken Desai was in high-strung discussions with bankers from lead underwriter Goldman Sachs and the pricing committee of the company's board of directors back in Hong Kong, about where to peg the share price. A month before, when Internet stocks were breaking the sound barrier, a price of US$16 for a market capitalization of US$549 million would have been a snap, even though the company was showing a net loss for the first quarter of US$8.1 million on revenues of US$1.5 million. With Nasdaq's nosedive the week before, however, these kinds of valuations were starting to look vulnerable. The decision was made to price the young company at US$14, valuing it at US$480 million, a handsome price even by Internet standards. Still, they decided to scale back the offering from 5.8 million to 5 million shares, or 14.5 percent of the total. Desai, exhausted and disappointed, agreed. "Because conditions were delicate," he says, "we wanted a reasonable chance of holding out in the market."

For every CFO, going public is proof their company is a world-class competitor. For starters, a successful listing can make hard-working managers into millionaires, even if only on paper. Even better, it puts cash in the corporate bank account - in Asiacontent's case, US$70 million (minus US$5 million in fees and expenses) down from the original target of US$106 million. What's more, the company wins immediate credibility. Future fund raising, while never a Sunday drive in the park, gets a lot easier and expanding the business becomes a workable prosposition. No wonder, then, that in 1999, six of 38 foreign IPOs listed on US exchanges came from Asia. And until recently, they all did pretty well in the aftermarket. At one point, Chinadotcom, the Hong Kong-based Internet portal, rocketed up 1,332 percent from its July 19, 1999 offering price of US$10 a share to US$143 a share. While not quite as impressive, Korea Telecom, a US$8.5 billion-a-year telecoms company, saw early gains of about 107 percent. By April this year, 15 more Asian IPOs listed on American exchanges with a dollar volume of US$3.54 billion. The big winner was China's Internet portal Sina.com, which as of May 11 was up 67 percent from it debut on April 13.

These successes aside, the Nasdaq crash has had chilling effect on the business of IPOs both in the US and Asia. While the local IPO markets have remained active, valuations are down and aftermarket trading is generally at issue price or lower. Hong Kong's Growth Enterprise Market (GEM), set up with easier listing requirements than Hong Kong's main exchange, has seen four IPOs shelved between April and June. Since its launch last November, GEM's index has plunged by 47 percent. Investors, says Hong Kong-based Rajeev Gupta, securities analyst for Goldman Sachs' Asia investment research division, are now wary of companies that don't focus on cost of revenue and cost of operations. "In this market, only the top companies in their field will be successful," says Gupta, "or those with a good track record of three to five years."

In Singapore, the market is considerably more lively, mainly because companies that do list have to meet higher requirements and more conservative investors demand solid prospects. From January 1, 32 companies had listed by June 1, compared with 50 for all of 1999. Only two companies postponed their listing. One of those, Internet search engine Catcha.com cited "weak market sentiment" for its delay and said it would push ahead only when stability returns. By then, it may be too late. Catcha's balance sheet shows about S$3.5 million (US$2 million) in cash with first quarter revenue of US$145,000. Profits aren't expected until 2002. But with capital expenditure of US$1.7 million in the first quarter, that delay might mean leaving the race permanently.

Maximum Overdrive

Given Nasdaq's weakened state, it's not surprising that Asiacontent's shares have flagged. On the first day of trading, Desai watched the share price rise to a high of US$15.98 and then plummet to close at US$11. By June 19, the stock was trading at US$4.12. "Sure the price is a bit disappointing," admits Desai, using remarkable restraint considering he and ten other executive officers and directors currently hold about 8 million shares or 23 percent of the company. "But we felt we had done our best. We're in good shape now; if we'd postponed we'd have lost momentum, the bankers would have lost interest and the window would have shut. Now we've got the money in the bank and can go ahead and execute our business."

Indeed, the CFO is a lucky man. The advantage of being a listed company over its unlisted competitors is readily apparent. Already, the company has used its funds to purchase a stake in Cityline, Hong Kong's movie and event ticketing service, adding to its stable of entertainment brands such as MTV Asia, SportsLine, CNET and Fashion TV Paris. In addition, it's launched three sites in China and boosted its e-commerce business with an investment in on-line retailer Net Megastore. The business is growing but it won't be profitable for a while yet. First quarter results show a net loss of US$8.1 million compared to a US$5.9 million loss in the fourth quarter of 1999. Revenues are up, though, from US$700,000 to $1.5 million over the same period. And with the company's newfound status, should it need to top-up its cash reserves to make up for the roughly US$40 million shortfall due to the scale back of the offering, Desai says getting more venture capital won't be a problem. That's because, despite the company's weak share price, its key backers such as GE Capital and H&Q Asia Ventures, are in for the long run.

Asiacontent's success, however, was not just a matter of luck. Despite the trials of a volatile market, roadshow burnout, bad food and frequently hostile investors, Asiacontent's managers knew that time was against them. When the 41-year-old India-born Desai joined Asiacontent in June last year, after 12 years working for Time Warner in Asia and the US, the plan was to go public in 12-18 months. At that time, the company had just acquired on-line publisher Tricast and US$20 million from investors in a private placement to establish a content, advertising service and e-commerce business targeting the Asia market. "We began," says Desai with the obvious pride of a seasoned CFO, "as a frugal company with an experienced staff - we're not 20 year olds."

Defensive Driving

The success of Chinadotcom's listing last summer and the pressure to get more funding suddenly put the IPO wheels in motion. Throughout July and August, Desai, along with former general manager of the South China Morning Post's Internet businesses and Asiacontent CEO Chris Justice, went through the Ôbake-off' - selecting the team of investment bankers, accountants and legal advisors. The basic criteria, says Desai, was the geographical reach, in terms of local and US strength; the depth of commitment and resources they'd devote to our company; and their experience in bringing successful deals to Nasdaq. "While initially we had doubts about Goldman's commitment," says Desai, "in the end we chose them as lead underwriter, along with Lehman Brothers and WR Hambrecht. The selection process wasn't a beauty contest but was based on the depth of their belief in us and ours in them."

By October, the team tackled that trickiest task of all - drafting the prospectus. "Imagine," says Desai, "ten people sitting in a room trying to write one document - in many ways it's a nightmare." For one thing, each party at the table has a different agenda. For the bankers it's short term - doing the deal, marketing it and hitting the hot button with the investors that are available at the time. For the lawyers and accountants, it's defining the framework in narrow, technical terms so that no expectations are created for potential investors that, if not met, could lead to future lawsuits. For company executives, it's a long-term roadmap - the prospectus is the one document that defines the future of the business. And all this had to be done with no real corporate track record to highlight - in the traditional terms of sales and profits, anyway.

From a business perspective, Desai says meeting Nasdaq's disclosure requirements is like baring your soul - you have to go through every piece of paper the company's ever signed related to its history, the founder's actions and related party transactions. There are absolutely no secrets, he points out, except for certain commercial transactions, such as licensing agreements with joint venture partners (eight in Asiacontent's case) and privacy regulations which varied considerably among the countries (again eight) of operation. "It was a constant fight to decide between what we had to disclose to investors versus the commercial risk in disclosing too much to our competitors," explains Desai.

Writing the financial section was no easier. Especially as the SEC, together with major accounting firms and the Emerging Issues Task Force, set up by the US Financial Accounting Standards Board to examine methods of financial reporting, were in discussions on how Internet companies report revenue. While still thrashing out the prospectus, for example, the SEC decided that if there's a payment risk between buyer and seller, a transaction must be recognized by the former at net value, not full value. "That decision affected our revenue numbers, of course," says Desai, "but it made the filing process easier." By early March, after writing and rewriting the prospectus, then filing and waiting and fine-tuning some more, the preliminary prospectus went to the printer. By then, it was time to shape up for the road.

No U-Turns

Because a roadshow is basically no different than selling soap, the company's road team - Desai, Justice and Chairman of the Board Clive Ng - needed some coaching from professional soap-sellers. While Desai is personable, even charming when discussing his business one-on-one, it was evident to his media consultant that his act needed some polishing. He got advice on how to be assertive, how to get his message across, and, above all, how to stay cool and civilized when someone in the crowd asks a prickly question. He was also told to purchase some long socks, as they wouldn't expose his naked calves to photographers when he was sitting down. With that advice in mind, it was time to hit the road.

The roadshow took just 12 days, cramming in meetings dates in Hong Kong, Singapore, Munich, Hamburg, Frankfurt, Milan, Edinburgh, London, Los Angeles, San Francisco, Denver, Boston and New York. "We did 80 presentations in all," says Desai, and each one had to be presented just like actors on a stage - with the same enthusiasm as if it were the first night. "Quite honestly," he says, "there was more hostility on the roadshow then we expected, mostly because of the Nasdaq crash." In Edinburgh, for example, in a room including some tough Scottish fund managers, Desai faced one sceptic who demanded to know: "Why list? Why not postpone?" Desai's reply: "The timing is based on our needs." In other words, we need the money now.

On the eve of Asiacontent's first trading day in New York, the team felt an overwhelming sense of relief. No matter that the final price was pegged at the low end or that the proceeds would be about US$40 million less (after deductions) than the original target. The IPO was fully subscribed. At breakfast on the morning of the first day of trading, the team gathers for a feast of doughnuts and Starbucks coffee, a favorite of CEO Justice. Later they head for Goldman's offices to cheer on the trading. Cameras flash and spirits are high as the price hits a high of $15.98 before starting to slide. Later, they take a taxi down to Times Square where an electronic sign is lit up with the message: "Nasdaq Welcomes Asiacontent.com."

Back in Hong Kong, reality sets in. Desai realizes that going public is just the beginning and with the company in the limelight it's time to start delivering. With one eye on the drooping share price, he's back to business - snapping up shares in Cityline, opening new websites and looking for new partners. "The biggest challenge now," he says, "is to focus on returns for investors and expand analyst coverage beyond the three banks that underwrote the stock. We've got to keep the momentum going. The key is to get a few good analysts who believe in the business and recommend it. That, in turn, will get investors interested." For a seasoned road warrior one thing is certain: you can't slow down.

Steven Crane is executive editor of CFO Asia