Digital Media

OpenTable was the special of the day on Wall Street on Thursday.

The restaurant-reservation company's stock soared on its first day of trading on Nasdaq, gaining nearly 60 percent to close at $31.89 after selling 3 million shares at $20 a share during its initial public offering Wednesday. Nearly 5 million shares changed hands, trading as high as $35.50.

OpenTable's stock performance is the biggest first-day gain for an IPO since energy-management systems firm Orion Energy Systems gained 65 percent in its debut in December 2007, according to IPO research firm Renaissance Capital.

OpenTable's revenue comes from monthly subscription fees charged to restaurants for access to the company's service, as well as a $1 fee paid by restaurants for each seated guest derived from reservations made on OpenTable's site.

The company earned 2 cents per share on nearly $16 million in revenue in the quarter ended March 31, 2009, and lost 10 cents per share on revenue of $13.2 million in 2008.

The San Francisco-based company says it has 10,000 restaurant customers around the world and has seated more 100 million diners since its inception in 1998.

Several young companies anticipate initial public offerings this week, but there's not a single high-tech outfit among them.

There's one green-tech company however. Changing World Technologies, a company that converts waste into oil, is one of four IPOs poised to hit Wall Street this week. Changing World is scheduled to price its IPO as early as Wednesday and could raise as much as $42 million, if it prices on the high end of its $11 to $15 per share range.

Nonetheless, while the four Wall Street prospects offer some excitement to their investors, there's little reason to believe that with a recession in full swing many companies will line behind them.

"If these four companies are able to successfully complete their IPO and post positive returns for at least a couple weeks, it could motivate some of the companies that have recently filed (to go public). But I don't see the flood gates opening. It takes time for the IPO market to come back," said Paul Bard, research director of Renaissance Capital, an IPO research and investment management services company.

One of the most recent companies to file its paperwork to go public is OpenTable, an online dining reservations company. One investment banker, who requested anonymity, noted OpenTable faces a number of challenges if it moves forward with an IPO during this recessionary climate.

Fewer people are dining out, as the unemployment rate soared to 7.6 percent in January, presenting a potential slowdown in business, noted the investment banker. OpenTable's annual revenues of approximately $40 million in 2007 and the first nine months of 2008 are roughly half the level investors like to see in an IPO.

OpenTable, having just filed its paperwork, however, is still a number of months away from doing its road show to talk with potential investors and hammering out its IPO price. For many in OpenTable's situation, there's no rush: some companies have languished in the IPO pipeline for over half a year and longer.

Companies set to price their IPOs and begin trading this week, in addition to Changing World Technologies, include Mead Johnson Nutrition, an infant formula maker, and O'Gara Group, a homeland security defense company. Both Mead and O'Gara are scheduled to price their IPOs Tuesday after the markets close and begin trading Wednesday, according to their underwriters.

Madison Square Capital, a real estate investment trust, is expected to price its IPO as early as Wednesday night, as with Changing World, and begin trading on Thursday.

(Credit: Renaissance Capital's IPOhome.com)

The disappearing IPO market
They'll be among the few in recent months to brave the public markets. The number of U.S. IPOs fell last year by 85.7 percent to 29 deals across all industry sectors, according to Thomson Reuters. Within the tech sector, that decline was even sharper--dropping a staggering 90 percent to four deals last year.

But don't entirely write off 2009 quite yet.

"If you can say there is any consensus at all, overall, it feels like investors believe the market will recover in the middle of the year and, typically, IPOs have been a lagging indicator to the overall market," said David Ludwig, managing director of equity markets for Goldman Sach's technology, media, and telecom practice. "Usually it takes a quarter or two for IPO market to become robust again once the market turns."

He noted, however, that given the IPO dry spell has lasted longer than in the past, there may be more companies willing to launch an IPO before the markets turn, especially if some of the first deals that test the market are well executed.

The last IPO to hit the markets was Grand Canyon Education, an Arizona-based online university that ended nearly a four-month IPO dought, when it debuted in late November at $12 a share. Grand Canyon's shares have outperformed the markets since its debut and the stock reached as high as $20.25 a share on Monday.

Who's on tap?
The performance of Grand Canyon apparently brightened the prospects for Bridgepoint Education, another online university, which filed its IPO paperwork with the Securities and Exchange Commission in late December. There's a reason both online schools appear to be doing well.

"Bridgepoint and Grand Canyon are educational companies and in a recession, when people are out of work, they go back to school," said Lise Buyer, founder of Class V Group, a firm that advises start-ups on preparing their companies to go public.

Other tech companies that recently filed IPO papers and remain in the IPO pipeline include Rosetta Stone, a foreign language training software maker, Emdeon, an automated payment system for the healthcare industry and Internet company OpenTable.

Although nearly two dozen companies have filed formal IPO paperwork since the market malaise in October, many are getting cold feet, Bard said. Since the start of the year, two companies have filed for an IPO while seven have withdrawn. And last year, 150 companies filed plans to go public but 184 companies withdrew, according to Renaissance Capital's IPOhome.com.

Within the technology sector, the companies that show the greater potential of offering up IPO candidates in this down market include software and services, which are viewed as defensive sub-sectors, said Cully Davis, managing director of Credit Suisse's technology practice for equity capital markets.

Meanwhile, other areas that appear to have gained some of that interest, investment bankers say, are security software, subscription-based services, network management, businesses around Netbooks, solid state drives, and clean tech.

Historically, tech and health care companies have been the lifeblood of the IPO market. Last year, tech and health care both ranked second with four IPOs each, behind the energy and power industry, which accounted for seven of the 29 deals that launched during the year. But in 2007, tech dished up the most IPOs with 40 of the 203 deals, followed by health care with 39 deals, according to Thomson Reuters.

What makes for a good IPO candidate?
Companies with lower capital costs will have an easier time posting a profit and, as a result, stand a better chance of launching an IPO, noted Buyer, who also cited annual revenues in excess of $100 million as another key item companies need to aim for.

Currently, the number of executives and venture capitalists seeking out bankers to take the companies public has substantially dropped, as they focus more on operating their businesses in the current economic and valuation environment, Ludwig said. But for those companies that are closer to being ready to access the markets, there's still interest.

There are caveats, investment bankers say. A couple years ago, tech investors wanted to latch onto IPOs that featured smaller companies with hyper-growth achieved through investing into sales and marketing, said Davis. But now, with their portfolios down, investors are less interested in hyper-growth companies and more focused on demonstrated profitability and realistic growth.

So when will the IPO market comes back again? Most likely, when investors decide a fresh face on Wall Street is a better bet than investing in an old one.

Google is calling in its chips in its $1 billion investment in Time Warner's AOL.

The search giant, which struck the back in 2005, gave it a 5 percent stake in AOL.

The 2005 arrangement, not only included collaboration on advertising, instant messaging and video, but also gave Google "certain customary minority shareholder rights," such as those related to any future sale or public offering of AOL.

With the markets in the doldrums and AOL's business continuing to take a beating, as evidenced in Time Warner's fourth-quarter earnings report Wednesday, Google is looking for payback time.

Last summer, Google announced it was considering writing down some of the value it had previously placed on its AOL investment. And when Google reported its fourth-quarter results late last month, the write-down figure came in at $726 million.

And last week, things apparently between the two companies seemed to get worse when Time Warner Chief Financial Officer John Martin said 28 minutes and 13 seconds into the company's fourth-quarter Webcast conference call:

At the end of last week, Google sent us a request to exercise their demand registration rights that it has for its 5 percent ownership stake in AOL.

We're reviewing what we received and we're evaluating our options. Those options include: preceding with the request, delaying the decision for sometime, or we can move ahead to potentially buy back Google's stake at an appraised value, which would obviously be well below the value that was placed on at the time of the original investment.

In other words, stay tuned for more to come...

Correction, 3:05 p.m. PT January 7: This story incorrectly identified the firm underwriting FriendFinder's IPO. The firm providing that service is Renaissance Securities (Cyprus) Limited.

This was originally posted at ZDNet's Between the Lines.

FriendFinder Networks, the company formerly known as Penthouse Media Group, is filing to go public to pay off almost a half a billion in debt in an equity market that stinks. Simply put, FriendFinder is launching an IPO Hail Mary to stay alive. At least FriendFinder's initial public offering filing turned up a bunch of interesting nuggets.

FriendFinder is best known for its Adult FriendFinder site, which is a social network for folks looking for services that probably shouldn't be mentioned on a family friendly site on Christmas Eve. But I'm a sucker for an entertaining regulatory filing as are a few other bloggers (Techmeme).

The IPO, which is underwritten by a firm called Renaissance Securities (Cyprus) Limited (we're not talking Goldman Sachs and Morgan Stanley folks), details a bevy of interesting stats such as churn rates on Adult FriendFinder as well as nuggets on how Penthouse magazine is trying to cover sports and games. FriendFinder also operates sites such as AdultFriendFinder.com, Amigos.com, AsiaFriendFinder.com, Cams.com, FriendFinder.com, BigChurch.com, and SeniorFriendFinder.com.

As background, Penthouse bought Various, which is the parent of FriendFinder, a year ago for $400 million. The $460 million in potential IPO proceeds will go to paying off FriendFinder's almost $450 million in debt. For the nine months ending September 30, FriendFinder had revenue of $243 million, operating income of $17.6 million and a net loss of $32.3 million. Prior year comparables are largely irrelevant since you're comparing a social network to Penthouse magazine.

Here's all you really need to know: This IPO is a Hail Mary pass for survival. The company says it all in its prospectus:

Our ability to continue as a going concern is dependent on our ability to raise additional capital, including from this offering. As of September 30, 2008, our balance sheet had approximately $43.3 million in cash and restricted cash and $420.1 million in short-term debt, net of unamortized discount, $411.0 million of which had been reclassified from long-term debt, due to our failure to comply with certain covenants and restrictions in the agreements governing our 2005 Notes and 2006 Notes and our subsidiary's First Lien Senior Secured Notes, Second Lien Subordinated Secured Notes and Subordinated Convertible Notes and for which waivers had not been obtained...If we are unable to cure such defaults and/or obtain waivers, we could trigger the acceleration of payment provisions in such agreements which would require us to immediately repay up to approximately $466.0 million to our noteholders. We do not currently have sufficient cash to repay this indebtedness if our debt is accelerated and if the noteholders instituted foreclosure proceedings against our assets, the proceeds of the assets could be insufficient to repay such indebtedness in full. Under these circumstances, we may be unable to continue operating as a going concern.

Comforting eh?

At least there are some really interesting stats from FriendFinder (since we don't get much color from private social networks like Facebook). Here's a look:

• FriendFinder averaged 1 million paying subscribers a month for the first nine months of September 30. That's good for 77.2 percent of Internet revenue. Net revenue per subscriber was $19.06 a month.

• Paid users, people who pay by usage, averaged 1.7 million minutes a month--good for 19.6 percent of revenue.

• The monthly churn rate is 18 percent for the nine months ending September 30, down from 19.6 percent at the end of 2007. Here's the breakdown by product category (click to enlarge):

(Credit: FriendFinder)

• Ad revenue of $152,356 a month for the nine months ending September 30 is skimpy. The company is hoping to change that, but acknowledges: "We have never generated significant revenue from internet advertising and may not be able to in the future."

• A nice history lesson on Various, which operates other social networks beyond Adult FriendFinder.

• American Express won't process credit card transactions for adult material.

• Various neglected to collect taxes in the EU. The company says:

After our acquisition of Various, we became aware that Various and its subsidiaries had not collected VAT from subscribers in the European Union nor had Various remitted VAT to the tax jurisdictions requiring it. We have since registered with the tax authorities of the applicable jurisdictions and have begun collecting VAT from our subscribers in the European Union and remitting it as required. We have initiated discussions with most tax authorities in the European Union jurisdictions to attempt to resolve liabilities related to Various' past failure to collect and remit VAT, and have now resolved such prior liabilities in several jurisdictions on favorable terms, but there can be no assurance that we will resolve or reach a favorable resolution in every jurisdiction. If we are unable to reach a favorable resolution with a jurisdiction, the terms of such resolution could adversely affect our financial condition or results of operations.

Overall, I'd file this IPO filing in the "you must be kidding" department.

One after another, venture capitalists are stating the obvious to the companies they've invested in: Now would be a very good time to keep your money under lock and key.

From Sequoia Capital, which has had parts of its dire economic presentation to its portfolio companies aired out in the press, as reported in VentureBeat and GigaOm, to angel investor Ron Conway in his letter to his portfolio companies, the message is clear and persistent: prepare for the worst.

M&A and IPOs Worldwide and Tech

(Credit: Thomson Reuters)

And that preparation, as Conway noted in his letter to portfolio companies, includes cutting marketing costs, general and administrative expenses and, yes, even layoffs if need be. Sequoia was a bit more dramatic in its message, reportedly using a tombstone with the engraved words "R.I.P. Good Times."

Faced with a tightening credit market and the markets in a virtual meltdown, the VCs that fund these start-ups are busy dishing out sage advice--and companies are taking it to heart much earlier in the game compared with the Internet bubble of 2000.

And for later-stage companies, the M&A route is virtually the only game in town. The IPO scene, in this bearish market, has virtually shut down, with only 44 tech initial public offerings out the door so far this year, compared with 215 deals last year, according to Thomson Reuters.

Start-ups that are fortunate to land another financing round should expect smaller rounds and ones with lower valuations for their company.

And while most tech companies are capital efficient, meaning they need little money to fund their operations, the hot investment area of "green tech" is not as fortunate, noted one venture capitalist.

"One area that is very affected and needs large sums of capital to take off is the novel energy ideas like solar, biofuels, and large-scale energy projects," noted venture capitalist Geoff Yang of Redpoint Ventures.

He added that businesses that plan to rely on the credit markets and finance markets to make their business models work are the ones that are at greatest risk in this current economic climate.

Click here for ongoing coverage from CNET News, 'Tough times for tech'