How an IPO Makes One Company Shine Over its Competitors

Also, how one money manager deals with value, plus the seedy side of Wall Street.
Author:
Publish date:

What a difference a deal makes.

If you ever doubted the power of an IPO by a high-profile investment bank and the way it can overly glamorize a company vs. existing competitors, look at the difference between

Allaire

(ALLR)

(the IPO) and

Unify

(UNFY)

. Unify (the existing competitor) was mentioned

here several weeks ago as the favorite of Connecticut money manager Scott Turkel. Both companies operate in the arcane but evolving space of developing Web-application software.

The difference: Allaire was taken public last week in a deal led by

Credit Suisse First Boston

, receiving that old

Frank Quattrone

touch. It quickly zoomed to yesterday's close of 49 from Friday's IPO price of 20.

Unify, by contrast, has been public for several years, operating in what until very recently was a space that Wall Street couldn't care less about. What's more, with $1.70 per share in cash, it's not a candidate for an investment banking deal. So, like many broken IPOs, it wound up orphaned by its investment bankers (

Montgomery

), which moved onto sexier stories (like Allaire, on which Montgomery is a co-underwriter). Its stock, which initially surged to around 16, spent the past year wallowing in the low single-digits before its recent rediscovery. Yesterday alone it rose 2 5/16, or 23%, to close at 12 7/16, as investors apparently made the connection with Allaire. Presumably they did a side-by-side comparison that showed:

Unify's 1999 revenue estimate (by Turkel) is $38 million; Allaire's, $33 million. (Both are growing in excess of 50% per year.)

Turkel's 1999 earnings estimate for Unify is 52 cents per share; he puts Allaire's estimated loss at 48 cents.

Unify's market cap as of yesterday was $102.7 million; Allaire's around $400 million.

The average selling price for their products: Unify, $50,000; Allaire, $5,000.

Still, the power of Quattrone the banker is a tough match for a stock that most people don't even know exists.

Short Positions

Ah, but does anybody care?:

As Unify and Allaire show, value is all relative. "You look at the market and you see the divergence," says San Francisco money manager Carter Dunlap of

Dunlap Equity Management

. "I've got a chart that shows the divergence between the whole

S&P

and the

Russell 2000

. It's at the highest gap since they started calculating the Russell. I can't see how the divergence between the nifty 50 and the rest of the market can continue to widen. I don't have to argue that one side will collapse, but I have to argue that you can spend a 100 multiple on 'X' and not worry about a 10 multiple on 'Y'. All you have to have is the gap widening, as it did last year."

Dunlap's trying to take advantage of the situation by buying what he perceives to be high quality, beaten-up companies "whose franchise value is going up because there are a lot of ways a company can increase its valuation." (Like the discovery of a stock or sector by the herd. Dunlap recalls when he attended an oil-services conference in 1995 when there were 90 companies and 70 attendees. The following year the same 90 companies came; this time, with oil services discovered, thousands of analysts showed up.)

Now his positions are as diverse as

Apria Health

(AHG)

,

Petsmart

(PETM)

and

Sterling Software

(SSW) - Get Report

. Apria was the result of a merger between two home health-care companies in 1996. "It was a badly done deal," Dunlap says. "It never worked out from the board level. It struggled, and finally a new investor came in and got serious and provided a management change." The company hired Philip Carter, who had successfully turned around

McFrugals

.

"He was semi-retired, and not looking for an assignment," Dunlap says. The stock fell early last year after Carter put a blackout on talking to analysts while he devised a plan. When he broke his silence, he said he believed the company could do $100 million in pre-interest/tax/depreciation/

amortization earnings in 1999, so the stock turned around. "I didn't sell because now it's a simple monkey see, monkey do," Dunlap says.

Now analysts are starting to project a profit, the stock has rebounded and Dunlap says he hasn't sold. "It's one of these things that once improvements and operating numbers start happening sequentially, it goes from having distressed credit valuations to comps with competitors that sell at 20-plus multiples."

As for Petsmart: Once a favorite of short-sellers, the company went through a management overhaul early last year. The new team has upgraded inventory and accounting systems, and as a result now believes operating margins can jump to 8% or 9% over the next two fiscal years; they're now around 3%. Estimates are for 40 cents per share next year and a range of 50 cents to 70 cents after that. "And if you go through the math of what they think they can accomplish, those numbers are low," Dunlap says.

What about the shorts? "They see the changes the company is making, and the category is healthy."

Finally, Dunlap has been a longtime holder of Sterling, which sells systems management software. "It was deemed a dull, boring company with a market cap of $1.8 billion, $720 million in cash and zero debt," Dunlap says. Earnings have been rising, "but you gotta read the MD&A

management discussion and analysis section in the 10-Qs to tell how well the company is doing."

Read the MD&A? In this market? Do actual research? You gotta be kidding.

Behind the scenes -- the seedy underbelly of investing and the press:

So, there I was last week, minding my own business, when my colleague

Suzanne Kapner

turned to me and asked whether I had received a phone call from someone who was saying that a story on

Action Performance

(ACTN)

-- on which she was making calls -- was bogus. I hadn't.

She had heard of the call from one of her sources, who told her a broker in Phoenix had been calling around, telling anybody who would listen that

TheStreet.com

(she) was working on a story regarding Action and that the story was untrue. What's more, the broker supposedly was saying that she was only talking to people who had negative comments and was hanging up on any distributor of Action products that had something positive to say -- a ludicrous assertion.

Two hours later, while I was on my way home, I got the call Suzanne thought I had already received. It was from one of my regular sources, who asked whether we were working on a story about Action. He said he had heard from someone else that the information we obtained was false and that the company planned to issue a statement regarding comments that had been made about Action on the Internet. (I told the guy I don't know about what my colleagues may or may not be working on; as a rule we don't talk to outsiders about what anybody here is working on.)

The next day Suzanne got a call from her original source, saying that the broker was now saying that "he has a line into Herb" and that he (me) was getting the story killed.

To which I say: Fat chance, buster. I don't get

anything

killed. (To read Suzanne's story, click

here.)

When brokers start making calls like that and trying to get stories killed, it's often out of desperation, and there's usually more to the story in question than meets the eye. And it usually isn't very good.

Herb Greenberg writes daily for TheStreet.com. In keeping with the editorial policy of TSC, he does not own or short individual stocks. He also does not invest in hedge funds or any other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg writes a monthly column for Fortune and provides daily commentary for CNBC.