Internet Initiative Japan Takes Wild Ride

Updated from 7:07 a.m. EDT

Speculative trading may afflict all stock markets, but credit Japan's momentum traders with bringing a certain panache to the party.

When U.S. stocks run amok, they tend to be driven by some vague marketing lingo about revolutionizing the world through turn-key solutions, or search-enabled advertising or 24/7 e-commerce platforms.

But during the great Japanese stock bubble, stocks soared on colorful rumors of cures for AIDS or environmental breakthroughs that would end the scourge of pollution. On the Tokyo Stock Exchange, you could dream big dreams and -- if you sold at just the right time -- make an even bigger profit.

That spirit of capitalistic idealism is in play behind Internet Initiative Japan ( IIJI), a Tokyo-based company that listed its ADRs on the Nasdaq in 1999, when the Japanese stock market was hostile to IPOs but its American counterpart was taking nearly all comers. IIJ surged as high as $13.90 this week from $2 in early May, with much of the gains coming on little more than an announcement that the company would help Toshiba battle another global scourge: spam.

Never mind that IIJ's announcement said that "Toshiba maintains tens of thousands of mail accounts" -- compared with the tens of millions managed by Microsoft's ( MSFT) Hotmail or Yahoo! ( YHOO). Since the June 7 announcement, IIJ's stock went from $9 to just shy of $14 on Monday.

Thin gruel for such a rally, so could there be something else pushing the stock higher? Well, there is an alternative explanation, albeit a less idealistic and possibly more cynical one.

On May 27, IIJ announced it would do what it hoped to do six long years ago: List its shares on the Tokyo Stock Exchange's Mothers Market for small-cap stocks. "The offer price for the public offering in Japan will be based on the closing price of IIJ's American Depositary Receipts on the Nasdaq National market on the date prior to the pricing date," IIJ said in a release.

On Tuesday, IIJ made another announcement: The price of its Tokyo offering would be based on the closing price of its Nasdaq ADRs on Monday, June 13. That closing price, $13.90, was the ADRs' highest level in nearly two years. Even more strange, the stock declined as soon as the IPO was priced, dropping 21% the following day.

What an incredible stroke of good fortune this was for IIJ and the venture firms that were selling shares in the offering. The ADRs were trading at $4.50 before the company announced its Japanese IPO. But thanks to the subsequent surge in the stock, the 2,500 shares that IIJ is offering, as well as the 900 being sold by its VC backers and another 500 to cover overallotments, will list at 2,859,886 yen, or $26,200, apiece.

Listing new shares on a second exchange can be bad news or good news. It can expand the float and make trading too liquid, weighing down all shares. Or it can raise millions to help the company expand. In IIJ's case, the tripling of the ADRs since late May is helping the company raise $66 million.

It's quite possible that IIJ is just very, very lucky. (The company didn't reply to an email asking for a comment on the surge in its shares following its IPO announcement, or the fact that the company itself is likely to be one of the biggest beneficiaries of that gain.) Or it may turn out to be not so lucky, because this is exactly the kind of odd stock movements that capture the attention of security regulators.

It's also likely that at least some of the rise in IIJ's stock is based on good old fundamentals. In the fiscal year ended March 31, IIJ posted a 7.5% gain in revenue and a net profit of $2.9 billion yen, or 75,858 yen per share, reversing several straight years of losses.

IIJ CEO Koichi Suzuki estimated the company's revenue will rise 11% in fiscal 2006 ending next March, and net profit will grow 27% to 3.7 billion yen, or 90,553 a share. "We're finally seeing the results of our efforts bear fruit," Suzuki said in the May 27 earnings call. "We're confident our numbers will continue to increase in the future."

At the Monday pricing, the shares being offered in the Japanese IPO stand at 38 times fiscal 2005 earnings and 32 times projected fiscal 2006 earnings. That level is high, but not outrageous, for a profitable U.S. technology company.

Whatever the reason for the rise, it's sent the Internet message boards into a frenzy. Wednesday's boards were full of clashing and seemingly baseless rumors: The SEC is investigating! IIJ insiders are selling! A key underwriter is backing out of the deal! There was even a bizarre side-debate on whether George W. Bush is a better president than Bill Clinton was.

But maybe taking a position in IIJ, or any speculative stock, is not unlike a polarized political debate: Pick a side, and you'll find plenty of evidence to support it. Then let history decide who's right.

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