Techpacific - Try not to Laugh
8 April 2000
Techpacific.com Ltd has launched its IPO, aiming to become Hong Kong's first listed pure internet incubator. Webb-site.com has analysed the prospectus. Although it discloses detailed information on previous financings and share options, these are all expressed in terms of shares which have since been split and been reorganised, so the average reader will have no idea what the directors, employees and 3 rounds of private investors actually paid for the stock. It takes a lot of work with a spreadsheet to figure that out. Fear not, we will give you the full history. We also found that over 85% of the cash revenue in the first and only year of the company came from related parties.
The company, which has just a 1 year track record, is aiming to issue 300m shares (subject to over-allotment of a further 45m shares) at a price range of HK$1.38-1.68 per share. For the purpose of this article, we'll assume a mid-point of $1.53 per share.
The basic offer then raises $459m gross or $417m after expenses of $42m (9.2% of the proceeds).
The new shares represent 12.5% of the enlarged issued capital of the company, but that is subject to further dilution by the "pre-IPO" share option scheme as well as post-IPO share options. In line with the recent SFC/ SEHK policy announcement, the company has been granted a waiver increasing the number of shares which may be placed under option to 30% of the company from time to time.
At flotation, they already have 19.7% of the 30% limit in outstanding options, most of which have an exercise price of either $0.196 or $0.476 per share. That followed the pre-flotation exercise of another 16.1% which will therefore not count towards the 30% limit.
Pre-placings
Now you might be thinking that the 12.5% offered in the IPO is less than the minimum free float of 15%. That's not a problem, because a lot of people who are not employees have been issued shares in the past three months, at prices way lower than the IPO price.
Here's a summary of the weighted average entry price of all the existing shareholders:
As you can see, you are being asked to put up 70% of the invested capital in return for just a 12.5% stake in this venture (the IPO proceeds are shown net of expenses). If and when the outstanding share options are exercised, the IPO shares will be diluted to only 10.4% of the company. Meanwhile the founders have an entry price of less than 1.6 HK cents per share (around 1% of the IPO price) and even the strategic and other investors have invested an average of just $0.168 per share.
OK, you might think that the existing investors took a lot of risk and so should be entitled to such a low entry price. In many cases, this simply is not true. The most recent round of funding (Round 3) closed on 28-Mar-00, just 3 days before the "Latest Practicable Date" in the prospectus. These investors paid HK$0.476 per share. You are being asked to pay more than 3 times that. In Round 2, which ran from 26-Oct-99 to 28-Mar-00 (over-lapping Round 3), shares were issued at HK$0.196 each.
The various rounds of share issues took place on the following dates:
Note that besides the 19.7% of the existing capital currently under option, and a further 10.3% which may be granted, there has already been 16.14% exercised just before the flotation.
Name dropping
Techpacific's roadshow video goes out with a thumping rock beat along with footage of employees playfully spraying each other with what looks like party foam and dancing to a lurid MTV-like background. What fun. Then comes the serious stuff - we see names like Softbank, Soros, Dell and GE floating past the techpacific logo. Great, if these companies are investing, it must be a sure bet! But wait a minute - what price did these guys pay? Take a look at the first 2 blocks in the second round of funding:
As you see, investors who came in a recently as two months ago are seeing a potential 8-fold gain in their shares if you can be persuaded to pay the IPO price for them. They have very little downside. Nice work if you can get it.
Quantum Emerging Growth Partners C.V. is a fund associated in some way with legendary investor George Soros. Henry Cornell is a Managing Director of Goldman Sachs and is a member of the Techpacific advisory board. John S. Wadsworth Jr. is Asia Chairman of Morgan Stanley Dean Witter. Daniel Widdicombe was a senior person at Bear Stearns, where techpacific director Johnny Chan worked prior to joining techpacific in Aug-99. Widdicombe recently became CFO of hotel networking provider i-Quest. William Bowmer is head of asian equity capital markets at Lehman. So if any of these firms are bullish on the stock, you have notice of the possible conflict of interest. Incidentally, techpacific Chairman Robert Owen (former Chairman of the SFC) is also a director of Nomura International (Hong Kong) Limited, the co-lead manager of the IPO.
We don't know anything about the other investors listed. Apart from Softbank, which is locked in for 6 months, the rest of the above parties (including members of the Advisory Board) are not subject to the lockup and are free to sell as soon as trading begins.
Round 2C
The 3rd leg of Round 2 (we'll call it Round 2C) is a block of shares allotted between 22-Mar-00 and 28-Mar-00, just before the prospectus went to print. Apart from directors and staff, several names in the prospectus are those of familiar people in investment banking. Peter Hamilton and Ian Henry are at China.com, David Kim is formerly of China.com and most recently of Softbank, and joined techpacific after the prospectus was printed, Eric Gerritsen is or was VP of international development for Lycos (where David Kim once worked), Anderson Whamond is a director of Regent Pacific and a former MD of Peregrine Securities International Ltd.
Adam Quinton is or was a telecoms analyst at Merrill Lynch, Kevan Watts is or was Executive Chairman Asia Pacific Region of Merrill Lynch, Graham Ormerod is or was with ING Barings, and Hiseh Fu Hua was formerly with BNP Prime before setting up his own direct investment fund. Henry Tsang Yuk-wong is an MD at Bear Stearns. Bo Hong is or was with Bear Stearns. Yu Pei-pei is or was an investment banker with Goldman Sachs and former colleague of Johnny Chan when he was at Bear Sterns. Peter Mallinson is or was in equity capital markets at Goldman Sachs. Stephen Ludwig was with Nomura in the fixed income division. Ravi Chidambaram was with Deutsche Bank's Asian investment banking arm. Tony Shale is Chairman of financial journal Financial Intelligence Asia. Kenny Hargrove is or was a journalist with IFR Asia. Doi Udomritthiruj is presumably related to Johnny Chan's wife of the same surname. Other investors include Fidelity Investors II LP and Fidelity Investors International Ltd. All public investors in Round 2C got shares at $0.1957 and are free to sell.
A former head of Asia Pacific Investment Banking for Merrill Lynch is David Michael Williams, who joined US venture capital firm Draper Fisher Jurvetson in Feb-00 and joined techpacific's advisory board in Mar-00.
The issue of shares in Round 3 of financing also took place between 22-Mar-00 and 28-Mar-00. This is when Dell came in:
Included in "various individuals and companies" ia a Max C. Chapman III, who presumably is the son of independent director Max C Chapman Jr. Unlike his father, Max C. Chapman III is not subject to any lock-up.
Yi Hua Assets Ltd is 50% owned by Francis Leung Pak To, who is a member of the Advisory Board of Techpacific. The other half is owned by Mr Leung's employer, BNP Prime Peregrine, which is sponsor of the IPO. Apart from SOFTVEN (a fund affiliated with Softbank) the other investors named in the table above are not subject to a lock-up and are free to sell. If you can be persuaded to pay the IPO price, they'll see a 3-fold return in 3 weeks.
Entry costs
Here, for your interest (we believe in full disclosure) is an analysis of the average entry costs of all shareholders. We'll start with directors and employees (including their proportionate interests held through companies they hold):
And now the other investors:
Lock-ups
The initial management shareholders are the directors, Softbank (and its fund), Mr Borromeo, Mr Siddiqui and Johnny Chan's spouse, Yuda Udomritthiruj. They cannot sell shares for 6 months, and after that, the 3 founding directors have undertaken not to sell if the disposal would reduce their holding below 35% of the voting power company for a further 6 months. All other shareholders are free to sell whenever they like. Details of the initial management shareholders' lock-up are shown below:
6-month lock-ups also apply to "significant shareholders" Tekbanc (12.59%) and Regent Pacific (5.66%). So the total lock-up is 69.02% for 6 months and 35% for a further 6 months, while the other 18.48% held by pre-float shareholders is saleable.
Francis Yuen Tin Fan (an independent non-executive director) holds his shares through a company in which he and his wife each own 50%. The lock-up only applies to half the shares held by that company.
Related Revenues
Over 85% of Techpacific's first year of cash revenues comes from related parties. Take a look at this table:
Tekbanc.com
Silk Route Asset Management was an original subscriber in the first round of financing, and along with Suleman Ahmed Saeed Al Hoqani, both transferred their stakes in techpacific to tekbanc.com Ltd on 28-Mar-00.
After the year-end, techpacific received fees of a further US$900,000 for advising and arranging the sale of tekbanc.com Ltd, presumably to its current owner, the Kuwait Fund for Arab Economic Development, which is a development finance agency owned by the government of Kuwait. As a result, the Kuwaiti government will have a 10.51% stake in techpacific.com after the flotation. They are subject to a 6-month lock-up. The tekbanc fees represent 90% of the cash corporate finance and advisory fees earned by techpacific in the first quarter of 2000.
Last year, techpacific subscribed US$76,001 for shares in Planetarabia Holdings Inc. (Planetarabia), which represented a 4% stake as of 31-Dec-99. Planetarabia.com is currently registered to one of Planetarabia's directors, Ali Siddiqui (with an address in Ithica, New York State). Mr Siddiqui and friends called Imad and Johnvey (their tech guru) founded Planetarabia in May-99. Siddiqui is also a senior manager of techpacific who joined the company at its inception. Of the original 4% of Planetarabia subscribed by techpacific, they assigned 3.21% at cost (US$61,001) to "certain directors and employees". Techpacific also may have received shares as fees, since it now has a 5.39% stake in Planetarabia with a book cost of US$16,000. In addition, it has also invested US$50,000 in convertible loan notes.
Of the other related clients, Daeyu Regent Securities is a subsidiary of first-round investor Regent Pacific, and BigSave.com Ltd (BigSave) is 74% controlled by Jim Mellon, the Chairman of Regent Pacific who is in the process of trying to inject BigSave into it (but that's another story).
The BigSave deal
Over half of the revenue of Techpacific's track record came from its first financial advisory mandate. This was for BigSave, commencing in Jan-99 (when techpacific was still an unincorporated business). BigSave.com is not an Asian internet play but is in fact an on-line store serving the UK from the Isle of Man.
As part of the placing, a director and shareholder of techpacific (who is/are not named) invested a total of US$4,002,050 in BigSave, amounting to 9.96% of its issued share capital at 31-Dec-99. In addition to the fee, techpacific received options to subscribe for BigSave's equity. From the recent Regent Pacific press release, we know that there were 34,928,423 shares of BigSave in issue as of 31-Dec-99, so that means that the price per share in the placing was US$1.15. Mr Mellon is now trying to inject 74% of BigSave into Regent Pacific at a valuation of US$3 per share, which is the price at which several placements totaling 2,700,000 shares (7% of BigSave) were done between Aug-99 and Mar-00.
Options over 2.5% of BigSave were passed back by techpacific to ECK & Partners Ltd (ECK) on 30-Mar-00, just before the float. This company is now owned by 3 of techpacific's directors (Ilyas Khan, Robert Owen and Johnny Chan), but the prospectus says that "until recently" ECK was 50% owned by European Capital Limited, which originally provided techpacific with free use of its offices and the services of Ilyas Khan. We guess that the "K" stands for Khan and that he owned the other half of ECK prior to its restructuring.
The remaining 7.5% of options over BigSave held by techpacific comprise 2.5% at US$1.15 (the old placing price) and 5% at the IPO price of BigSave (if that happens).
European Capital Co Ltd is a London-based project and corporate finance house of which Robert Owen (techpacific's Chairman) is a director and Japanese trading giant Itochu is a shareholder. ECK put up US$105,000 of the first round of US$270,000 financing for techpacific. Mr Owen is also a Director of Regent Pacific. A senior manager of techpacific, Stephen Christopher Smith, was previously an Associate Director of European Capital.
Regent Pacific also owns 24.9% of techpacific.com Venture Capital Ltd (TP.comVC), while the other 75.1% is owned by techpacific. TP.comVC manages the "Nirvana Fund" which is the fund set up to invest in incubatees. The manager receives 2% per annum and a 20% profit share of any profits in excess of a 10% p.a. return.
The Nirvana Fund was launched in Dec-99 and techpacific initially put up US$1m of the US$50m target. Techpacific has also committed to invest US$10m in a wholly-owned subsidiary which will co-invest alongside the Nirvana Fund. There are over 100 investors in the Nirvana Fund including Jim Mellon and Regent Pacific.
Jim Mellon's company, Interman Holdings Limited, also owns an undisclosed stake in techpursuit.com Holdings Ltd, set up on 27-Mar-00 to provide recruitments services through the internet. Techpacific has injected US$200,000 into this for a 40% stake, and Interman and Anthony Baillieu & Associates Ltd own the rest.
Post-float, Regent Pacific will own 5.66% of techpacific acquired at an average of just $0.0428 per share, and will be subject to a 6-month lock-up as a "significant shareholder".
Options
In addition to cash fees, techpacific has also taken options over equity and subscribed small stakes in companies which it has advised. To date it has invested a total of US$2.01m in 10 such companies.
Last year techpacific subscribed US$1,225,000 for shares in Netease.com, Inc which represented 2.99% of its issued share capital at 31-Dec-99. However, 2.16% of this was assigned at cost to "certain of the directors and employees" of techpacific, so it only has 0.83% left at a cost of US$340,000.
Other investments
The week before its prospectus was finalised, techpacific went on a binge of transactions:
On 22-Mar-00 techpacifc agreed to subscribe US$1.75m for 40% of SoftPub.com Inc. The domain SoftPub.com is registered to someone called Frankie Cheung. The company is described as a web services business, with a core management team which has been involved in web design since 1996.
On 24-Mar-00 techpacific agreed to subscribe US$1.75m for 25% of GCG Asia Ltd (part of Gorilla Communications Group, or GCG). This company is the for-profit conference organising affiliate of the iandi Asia technopreneur meetings. Also in Mar-00, Jonathan Hakim, a co-founder of both GCG and iAndi Asia, joined techpacific to head up its incubation center.
On 28-Mar-00 techpacific agreed to subscribe US$600,000 for 10% of BDA China Holdings Ltd. The principals of this firm, which is a consultancy specialising in internet and telecoms in China, are Duncan Clark and Ted Dean.
On 30-Mar-00 techpacific agreed to subscribe US$1m for 11.1% of New Zealand-based web design company WebMedia Group Ltd.
Techpacific has signed a non-binding MoU to acquire 35% of Upstream Ltd, a company formed by David Ketchum, a public relations and media expert, for US$250,000.
Techpacific has signed a letter of intent to acquire for an unknown sum 25% of Asset Publishing and Research Asia Limited, which publishes Asset Asia magazine.
Techpacific has signed a letter of intent with outdoor advertising company Top Result Interactive Ltd to acquire for an unknown sum up to 30% of i-Result Media Ltd, a company to be formed to engage in online media business.
Nice business, silly price
Don't get us wrong. In a short period of time techpacific has assembled what appears to be a competent team of professionals. There is a real need in start-ups, which are often run by young people with little business experience, to have the resources of an incubator at their disposal. Legal, accounting, public relations, HR and administration - this is the nitty gritty stuff which slows down an entrepreneur and can be outsourced to an incubator. In other words, we like the team. They've had time to practice on their related companies, in particular the Regent Pacific / BigSave group, and are also starting to do some real business with unrelated companies.
But the way in which the share offer has been put together shouts of opportunism and pyramid selling. We cannot see how the value per share of the company can have gone up 3-fold in 2 weeks, even if you believe the original prices. Many of the current shareholders are not locked-in and paid only $0.476 per share 2 weeks ago, or $0.196 in the last 3 months, and you are being asked for $1.38-1.68. The company wants you to put up 70% of the invested capital (net of expenses) for 12.5% of the firm, and the outstanding options will dilute that to 10.4%.
Techpacific - ask us for money, but don't make us laugh. Readers who want the stock should wait for the after-market - there should be plenty available.
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