Concentric: A Networker with Navigation Trouble

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Concentric Network (CNCX:Nasdaq) seems to have lost track of its investors since a buoyant initial public offering on Aug. 1.

The Cupertino, Calif., company issued 4.3 million common shares at 12; the stock rose to 16 during that initial session before closing at 14 3/8. Only meager blocks of shares have moved across the tape in recent sessions; at midday Thursday Concentric had lost 1/8 to 12 3/8.

Since the IPO, bearish signals have started to coalesce around Concentric. For one, some proceeds from the IPO are likely to repay earlier investors for several ill-fated issuances, at the expense of corporate coffers. Large companies are leaping into Concentric's increasingly commoditized business, and other Internet service providers have posted mixed results on Wall Street. Given the rising bearishness and the company's still-rich valuation, Concentric may soon pique the interest of the ever-voracious shorts.

Concentric, like several Internet service providers and related concerns that have come public in the past year, peddles Internet-related products and services. But this field is no longer the domain of cowboy-esque upstarts. In its business of providing Internet connections, Concentric now battles giants like

AT&T

(T) - Get Report

and

UUNet

, a unit of

WorldCom

(WCOM)

.

Bandwidth is increasingly a commodity. Like other Internet service providers, Concentric is struggling to gain a competitive edge by selling services and expertise to corporations in addition to straight capacity. The company also connects consumers to the Internet and says it will add long-distance phone service to its offerings.

Remember

Diana

, the erstwhile darling of Wall Street's momentum players? Diana touted a hot switch for computer networking, and its stock leapt from 12 1/2 in January 1996 to about 100 in late May that year. As investors questioned the technology, Diana's stock deflated. On March 10 the

New York Stock Exchange

suspended trading of its shares.

Concentric is one of the few customers that gave Diana money. According to a recent legal settlement, by Friday Concentric must fork over $4.4 million to Diana's

Sattel

unit, in return for products it used. In addition, the company must repurchase a big chunk of stock from Sattel. Details in the prospectus are thin, but given the legal tangle, one must wonder how valuable Concentric found Diana's products.

Concentric also has an interesting track record, according to

Securities and Exchange Commission

filings. Prior to the IPO, the company sold convertible debentures and common stock amounting to 105,828 shares (counted on June 30), for prices ranging from 3 3/4 to 30 per share. Such an issuance may have broken the law, according to the prospectus, and Concentric will soon offer to buy it all back. Hmm.

Another wrinkle in the equity category: The company may have to rescind options it doled out to employees in 1995 and 1996, after a California regulator denied its permit for issuance in March 1996. So who's paying for those repurchases? Shareholders who bought into Concentric's IPO -- perhaps as much as $2.54 million, according to the prospectus.

To be sure, some big names have poured money into Concentric. As its IPO rolled into the markets, the company announced a private placement of 1.5 million shares with hardware vendor

Bay Networks

(BAY)

and

Williams Communications

. The unit of

Williams Cos.

(WMB) - Get Report

sells both energy and business communications services.

Company officials, restricted by an SEC-enforced quiet period, declined to comment for this story. For similar reasons, analysts at the underwriters

Unterberg Harris

and

UBS Securities

have not yet officially rated the stock. Craig Sultan at Unterberg declined comment.

"Concentric is in dire financial straits," says Manuel Asensio, president of

Asensio & Co.

investment bank, who correctly predicted to

TheStreet.com

in

January that Diana stock would drop to the neighborhood of 5. Asensio was short Diana. He has no position in Concentric, short or long, but he considers it overvalued.

ISPs form a mixed lot on Wall Street. There are success stories --

MindSpring

(MSPG)

, which sells mostly to consumers, stumbled somewhat after going public at 8 in March 1996, then recovered. This spring the skies brightened. In the second quarter MindSpring flipped its negative cash flow into positive territory; since a March 24 trough of 6 7/8 its shares have gained 116% to end at 14 7/8, down 1/4, on Wednesday.

But

Earthlink

(ELNK)

soared after its IPO in January 1997 and then skidded sharply. While the stock has gained 16% from a May 1 low of 8 5/8, it still trades below the offering price. And on Wednesday the company disclosed in its 10-Q filing with the SEC that it doesn't have enough cash to cover expenses for the rest of the year. That evening the company recanted the statement in a press release, claiming it could weather the storm, but that perhaps only damaged its credibility further.

"Just recently the market for ISPs has begun to strengthen," says Craig Moseley, vice president of

Daniels & Associates

investment bank in Denver. He believes the business will grow robustly over the long term. His firm has performed no underwriting for the three ISPs.

If it taps that growth, Concentric still isn't cheap. Shares trade at 5.3 times trailing sales, compared with 3.2 for MindSpring and the average of 1.41 for the computer-systems services index compiled by

Baseline

.

"The stock seems to be overpriced, for my taste," says Manish Shah, editor of

IPO Maven

research service. He predicts short-term pain for investors, and says

BellSouth

(BLS)

poses no small competitive threat in the long term.

This story was orginally published August 14, 1997