Savvy IPO sales techniques usually work on investors, especially those eager to get their hands on shares of the latest new thing.
But in the case of
, the manufacturer of radio frequency identification systems, the bankers couldn't put enough lipstick on the pig to save the company's initial public offering from being pulled last Friday.
To be sure, the Alien Tech IPO began with a couple of strikes against it. The Morgan Hill, Calif.-based company decided to go public just as the environment for IPOs began to sour on Wall Street. It didn't help that Alien Tech has never turned a profit in its brief history.
But sources say the clincher was investor unease about the company's CFO Robert Eulau, who came to Alien Tech this past spring from
, a company that's caught up in the options-backdating scandal.
In a more ebullient market, investors might be willing to overlook such a blemish, figuring it has little bearing on a company's prospects. But with the IPO market on shaky ground, any kind of wart involving a top corporate executive can be the kind of risk that gives investors reason to pause.
"In a good bullish market, bad news or problematic news is much easier to absorb. Clearly, in a rougher market, there is a lot more scrutiny," says Jay Suskind, head of institutional equity trading with Ryan Beck. "Even good news is not appreciated fully. It's all the psychology of the marketplace."
Alien Tech declined to comment.
Alien Tech designs, manufactures and sells radio frequency identification products. It first filed to go public in April. The company's technology helps businesses keep tabs on their operations and products as they are sent out into the marketplace and shipped from one place to another. The company has clients in all types of industries, such as retail, transportation and defense.
There's no doubt that Alien Tech's financials weren't as polished as most investors would have liked. The company operated at a loss for the past three years, and in 2005 incurred its biggest loss yet, primarily due to stock-based compensation hits that the company took during the year. The success of Alien Tech's business is also largely dependent on its two main users:
and the Department of Defense.
But another warning sign emerged shortly after Alien Tech filed for the IPO. A few months after Eulau joined the company, Rambus disclosed that it is one of more than 80 tech companies caught up in the stock options-backdating scandal. Worse, Eulau served as Rambus' CFO from July 2001 to March 2006, the period of time that is the focus of the investigation.
Stock-options backdating has become corporate America's latest accounting problem. The scandal centers on how some companies priced the options they granted to their executives over the years.
Normally, an employee stock option grants the right to buy a company's stock at a price equal to the market price of the stock on the day the options were granted. But when it comes to backdating, some companies allegedly went back in time to set the prices for their options at or near 52-week lows. The effect of backdating is to lower the strike price to make the options more profitable.
Rambus is undergoing an internal audit to review the extent of the backdating. Last month, Rambus said it would restate financial reports dating back at least three years due to discrepancies in its stock option-accounting practices. The company also is facing a number of lawsuits over its options policies
As with every IPO, Alien had a dense "Risk Factors" section in its prospectus in which the company outlined, among other things, the risk of Eulau's employment at the firm. As part of the management team, Eulau was a recipient of many option grants. In the risks section, it noted that Eulau has been named as a defendant "in multiple shareholder derivative actions ... relating to Rambus's stock option practices." The prospectus went on to warn that "Eulau could cease to serve as our chief financial officer if he becomes subject to an order preventing him from serving as an officer of a public company.''
A representative from Rambus declined to comment further on the investigation.
In a happier time, Eulau's role at Rambus normally would have gone unnoticed. The risk section would have been treated by most as mere boilerplate.
In fact, that's what investors did a year ago, when all of Wall Street ignored the news that a top executive at
had run into some serious trouble with securities regulators. Investors also overlooked warnings in the brokerage's prospectus that the firm's financial controls weren't up to snuff. Instead, Refco's IPO last August was quite a hit, rising nearly 20% in its first day of trading.
Yet, two months later, the commodities brokerage went bust after being sunk by an unrelated accounting scandal that led to the filing of criminal charges against its former CEO. After the debacle, some investors said they wished they had paid closer attention to the warning signs indicating that something might have been amiss with Refco's management.
This August, however, the IPO market is thorny, and Wall Street is suddenly souring on new stock offerings. The Alien Tech IPO, which was being run by
, now joins a list of other failed deals. Recently, a number of IPOs have been
delayed or canceled, including offerings for brokerage firm Ryan Beck and restaurant chain Gordon Biersch Brewery.
learned that an IPO of Qimonda, being run by
, was also
running into some trouble.
"There is always the basic idea of a small amount of information having a big effect," says Matthew Rhodes-Kropf, professor of finance at Columbia University. "Sometimes there is only a tiny amount of information, but it actually provides a normal amount of scale."