Internet Initiative Japan's Pull and Push in Public Markets

Say one thing for Internet Initiative Japan ( IIJI): It really means it with that word "initiative."

After pulling a long-desired stock offering from the Tokyo Stock Exchange only a few days after it priced, the company is vowing to get listed in Japan. CEO Koichi Suzuki said in an interview with Reuters last Friday that IIJ is undeterred in its goal of having the stock trade in its native country. A Nasdaq listing, it seems, isn't enough.

Actually, the Nasdaq listing could be seen as a liability. In a reaction that must have been greeted with mixed feelings by Suzuki & Co., IIJ's Nasdaq shares rallied madly on the news, rising 23% in a single day Monday. The stock further climbed as high as $8.7 Tuesday before closing unchanged.

IIJ and Daiwa, the lead underwriter of its failed Japanese offering, made the fatal error of pricing the offering in the midst of a manic rally in the Nasdaq shares. That inflated the price of the Japanese offering to the point where nobody wanted to buy it. The Japanese shares would be priced at a 6% discount to the close of IIJ's Nasdaq shares on June 13. Those shares stood at $13.90 at the close.

Worse for IIJ's Tokyo offering, the Nasdaq shares began tanking the next day. So institutional investors were presented with a less-than-enticing bargain: Buy shares in the Japanese offering for roughly $13 a share, or buy the Nasdaq shares for between $10 and $11 a share, which is where they were trading when underwriters began shopping the Tokyo shares around.

In business since 1993, IIJ has found the golden ring of a Japanese listing hard to grasp. Finding the public market unwelcome in the midst of a prolonged Japanese recession, IIJ listed 7.16 million American depositary shares on the Nasdaq in 1999 for $23 a share. Goldman Sachs and Morgan Stanley, two of the most respected underwriters of the late '90s, co-managed the offering.

Bad news has dogged every stock offering that IIJ has been involved with. Its Nasdaq shares proved volatile, even by the standards of the dot-com boom and bust. They rose as high as $123.50 in February 2000, then fell as low as $1.41 in April 2003. That marked a 99% drop from IIJI's record high and a 94% discount from the value that the underwriters had accorded IIJ in the offering. (IIJ's stock is still less than a third of its offering price.)

That lackluster performance led to a shareholder lawsuit that alleged that underwriters "laddered" the offering -- that is, they allowed investors in on the IPO on condition that they would buy more shares in the aftermarket to ratchet it higher. A settlement that released IIJ and underwriters from liability paid as much as $1 billion in recoveries, which was paid by insurers.

IIJ fared even worse with the IPO of Crosswave Communications, a joint venture of which IIJ owned 40%, with the remaining ownership split between two partners, Sony ( SNE) and Toyota. Crosswave, which is set up to sell broadband access on a brand new fiber-optic network, listed on Nasdaq at $14 per ADS in August 2000. It was delisted two years later as the company filed for the equivalent of bankruptcy protection in Japan.

Crosswave's assets were eventually transferred to Japanese telecom giant NTT Communications, a subsidiary of Nippon Telegraph and Telephone ( NTT). Around the same time, NTT injected $13.3 billion into IIJ in exchange for 15,880 shares, a transaction that boosted NTT's stake in the company from 6% at the time of the Nasdaq IPO to 32%. The 5 billion-yen deposit ($45 million at today's rates) that IIJ put down to secure a 15 billion-yen bank loan for Crosswave was lost.

Suzuki has said repeatedly that IIJ's financials are on the mend -- the company went from several years in the red to a profit in the fiscal year ended March 31, 2005 -- and that he's intent on pushing margins higher. If so, the company could break its string of unlucky listings and finally win a warm welcome on the Tokyo exchange.

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