May 1999

Contents

Market Success Pushes IPO Filing to Record Levels

The recent flood of IPOs into the market has not affected the performance of their openings as the IPO frenzy continues to see soaring numbers. Within the month of April, there were numerous initial public offerings from various aspects of the Internet industry. From Razorfish to the Applied Theory Corporation, the IPO market has experienced a wide range of Internet-geared companies. Firms that have priced this month include Mpath Interactive, which experienced a first-day gain of 181%, Marimba, an Internet software management solution provider, and Razorfish, one of the hottest Web consulting firms in the market.

With the success of these IPOs in addition to a year of ".com" phenomena, it is no surprise that the number of Internet companies filing for initial public offerings increases daily and at record levels. Companies that have recently filed include Digex, which is a provider of Internet hosting services to businesses and institutions that implement interactive Web sites and Web-based applications. The company offers hosting and consulting services to over 500 customers such as Nike, J. Crew, and Universal Studios. Digex anticipates an enormous response as it has filed for a $100 million IPO.

In an attempt to emulate Priceline.com's IPO success, Travelscape.com, formerly Las Vegas Reservation Systems, has filed for a $69 million IPO. Travelscape.com provides consumer-direct online travel services to popular destination markets with reported revenue growth of 59% since 1996. Yet another firm engulfed by the ".com" fantasy is Salon.com, which provides original content sites and communities which cover various subjects including news, technology, and entertainment. Salon's IPO will be unique in that underwriter W.R Hambrecht & Co. will use an OpenIPO process -- an online offering using a sophisticated financial technique, which promises to make offerings like Salon's available to a wider class of investors, and possibly bring into the fold people familiar with a company's products.

Also in the IPO pipeline is Commerce One, a provider of e-commerce solutions that link buyers and suppliers of business goods and services into Internet trading communities. The firm is experiencing sharp revenue growth, reporting $2.1 million in the three-month period ended December 31, 1988. It has developed strategic partnerships with such telecom giants as British Telecommunications and Japan's Nippon Telephone and Telegraph. The IPO frenzy has also enticed Cortelco Systems, which develops and markets integrated enterprise communications of businesses and other organizations, to file for an IPO. Among the company's customers include Circuit City and Bell Atlantic. With so many IPO prospects in the pipeline, investors will likely continue to see this frenzy for some time to come.

PSINet and Dell Invade Latin America, WinStar and CBS Enter Agreement

U.S. commercial Internet provider, PSINet Inc., announced it has acquired two privately held Brazilian firms, marking its entrance into the Latin American Internet service market. Consequently, these acquisitions make PSINet one of the top five Internet service providers in Brazil. The acquisitions of Internet access services, Openlink and Horizontes, will add to PSINet's cash flow in which Wall Street analysts anticipate the company to reflect positive cash flows in the second half of this year.

Openlink is the largest ISP in Rio de Janeiro, and serves both consumers and businesses with "dial-up" and "always-on" connections as well as the capacity to host Web sites on behalf of businesses. PSINet has stated that there are 4 million Internet subscribers in Latin America, with half of them residing in Brazil. This number is expected to increase to 3 million by mid-1999.

Also diving into the Latin American Internet market is Dell Computer Corp. with a Spanish-language World Wide Web e-commerce offering similar to the company's hugely successful U.S.-based e-commerce service. "Dell America Latina" has already been providing the company's customers with product information and service and support. Latin American customers will also be able to tract the status of their order on the Web site, and view the exact dates their customer-designed system enters production, is built, and is finally shipped. Dell claims that its expansion into Latin America is attributed to the attractiveness and growth of the region's Internet business.

Here in the U.S., CBS has taken a 33.3 percent stake in WinStar's Office.com site, in exchange for $42 million in promotion and advertising over the next six years. For the old-media giant, the move representing another step into the Internet arena, where it has recently announced investments in entertainment site hollywood.com and e-commerce site storerunner.com. For WinStar, the deal strengthens its strategy of controlling both the backbone and the content for high-bandwidth business-to-business communications, and it moves the company one step closer to spinning off Office.com and taking it public.

AT&T Dives into Japanese Telecom Market

British Telecommunications Plc. and AT&T Corp. have announced they will acquire a 30% stake Japan Telecom Co. in a $1.83 billion deal that marks the latest move in a global shakeup of the telecommunications industry. Under the terms of the deal, BT and AT&T will each acquire a 15% equity stake in Japan Telecom. The deal will give the two western operators a significant foothold in the Japanese telecommunications market, the world's second largest and an important missing link as the two companies try to offer seamless data services that cover the global market.

Japan Telecom provides international, long distance, data, and Internet and local service in Japan with some 17 million customers. Furthermore, it has stakes in digital mobile companies, which have more than 6 million customers. Japan Telecom will become the sole distributor of British Telecom and AT&T's proposed global venture branded services and a preferred supplier of services to the venture. The alliance will cover markets in the United States, Europe and Japan. The deal, which had been widely expected, is the first large investment by outside investors in Japan's deregulating telecommunications sector. It is also the latest in a string of telecom mergers that includes Deutsche Telekom and Telecom Italia.

AT&T penetrated the Japanese telecom market once more as it and Japanese telecom giant NTT announced they had formed a partnership in the lucrative business of global networking solutions business for corporate customers. This marks the first time Nippon Telegraph and Telephone Corp. (NTT) has entered a partnership with another telecom giant on the global level.

The stake in Japan Telecom gains AT&T access to the Japanese firm's extensive domestic network and entry into the basic infrastructure-related data business, while the alliance with NTT is geared to the profitable software and service-oriented businesses. Under the agreement, AT&T and NTT will consider setting up a Japanese joint venture to handle management of a global corporate networking business which AT&T recently bought from IBM.

Silicon Alley Sets its Eyes on Bond Market

Though the recent overwhelming success of the stock markets have pushed such online companies as E*Trade, Ameritrade, and eSchwab to command a strong presence on the Internet, the lucrative bond market has been under close examination by "e-traders." Despite E*Trade's recent entrance into the bond market, other online ventures have headed down the road of bond trading, particularly TradeWeb.

TradeWeb first began operations in January of last year with big name dealers such as Credit Suisse First Boston, Goldman Sachs, Lehman Brothers and Salomon Smith Barney providing funding and offering the bond for sales on the system. Merrill Lynch joined in April of 1998 and this year Barclays and J.P. Morgan followed suit. Last year, TradeWeb boasted $170 billion in transactions volume with over 500 users participating in the trading of U.S. Treasury bills, notes, bonds and STRIPS. However, TradeWeb earns its revenues through a monthly subscription charge of $100 rather than charging for each transaction.

Along the same lines as TradeWeb, LIMITrader is concentrating on the corporate bond market. So far, the company has received $5 million in funding by various investors such as Softbank Technology Ventures, Zero Stage Capital, and Jeffrey Parker, who is founder of First Call Corporation. LIMITrader is initially concentrating on developing a service to match up buyers and sellers on an anonymous network, basically supplanting the function of an interdealer broker, an individual who acts as a middleman between the buy side and the sell side. In doing so, this company receives a percentage of the value of every transaction. Unlike TradeWeb, LIMITrader also plans to allow corporate treasurers to issue medium term notes directly to investors over the Internet.

Though the online bond trading market sees a bright future, it will face strong competition from Bloomberg, which has already begun to develop its BondTrader system. However, Internet-based systems are well positioned to take over since they enable traders to make transactions from virtually any connected machine.

Microsoft, Comcast Team Up for MediaOne Buyout; GEC Purchases Fore Systems

Microsoft Corp. recently announced it has signed a "confidentiality agreement" with cable company MediaOne Group Inc. to explore how the software giant might contribute to a possible new buyout bid by Comcast Corp. Competing in the bidding war for MediaOne, Microsoft has shown an increased interest in stopping AT&T Corp. from snatching an even larger slice of the U.S. cable market. Currently, Microsoft owns a 5% stake in Comcast, which already has a $48 billion merger agreement with MediaOne. However, AT&T, fresh off its buyout of Tele-Communications Inc., stepped in on Comcast's deal and offered $58 billion for MediaOne. Under the terms of its deal, Comcast requested that MediaOne provide operating information to Microsoft, which may help save its embattled buyout bid for MediaOne.

This agreement between MediaOne and Microsoft comes just days after Comcast had sought support of Microsoft and America Online to salvage its agreement with MediaOne. AT&T and MediaOne, which unveiled a confidentiality agreement of their own recently, have been in "closed-door" talks to draft a formal merger deal in the very near future. The maneuvering by Microsoft is seen as a preparatory step if AT&T and MediaOne should strike a deal. Microsoft has developed a strong interest in cable companies, most notably in its purchase of a $1 billion stake in Comcast last year.

Also involved in the Internet company buyout trend has been General Electric Co., which has acquired Fore Systems Inc. for $4.5 billion. This deal looks to further enhance GEC's position into the telecommunications business. Fore Systems, a global supplier of Internet switching equipment, broadens GEC's push to develop a leading global communications infrastructure, which intensified earlier this year when it agreed to separate and merge its defense electronics business with British Aerospace. Furthermore, two weeks prior to the purchase of Fore Systems, GEC completed a $2.1 billion tender offer for Reltec, a developer of products and service providers that would provide the company with a digital loop system to end users to go with its existing high volume data network.

Japanese Business in the United States

  • Omron Corp. announced that wholly owned U.S. unit Omron Electronics Inc. has reached agreement to acquire Industrial Drive Maintenance Inc., a U.S. control-systems company. Under the agreement, Omron will purchase all of the Texas-based company's outstanding shares.
  • Kawasaki Heavy Industries Ltd. plans to collaborate with two U.S. aircraft manufacturers in developing and producing a tilt-rotor plane capable of vertical takeoff and landing. Bell Augusta Aerospace Co. and Aerostructures Corp. are to work with Kawasaki Heavy on the BA609, which is said to be the first civilian tilt-rotor craft.
  • Teijin Ltd. plans to expand business ties with U.S. chemical giant E.I. du Pont de Nemours & Co. into polyester-filament production in North America. The two companies have already joined in producing polyester film.
  • Nidek Co., a medical equipment manufacturer, established a joint venture with Inax Corp., Toyama Chemical Co. and the Tokai Bank group to become the first business in Japan growing human tissue for skin grafts. Nidek also plans this year to begin full-scale marketing in the U.S. of its laser equipment for treating near-sightedness.
  • Honda plans to build a new plant in the United States by 2001 to keep pace with growing sales in North America. With a new plant, Honda could be producing more vehicles in North America than in Japan by early in the next century. Although the site of the third plant in North America has not been determined, it is likely to be in the Midwest or the southeastern region of the U.S.
  • Toyota Motors Corp. and General Motors Corp announced a five-year deal to co-develop alternative fuel technologies - a pact which could eventually lead to jointly manufactured vehicles. The two companies said they will commit hundreds of engineers to more than a dozen projects to speed the development of electric vehicles, hybrid electric vehicles and fuel cells for electric vehicles.
  • Aisin Seiki Co. will supply automatic transmissions for midsize trucks to U.S. truck manufacturer Freightliner Corp., an affiliate of DaimlerChrysler AG, beginning in June. Aisin Seiki plans to manufacture the transmissions at its Aichi Prefecture factory and is targeting about $4.1 million in annual sales.
  • The San Francisco Federal District Court issued a preliminary injunction in April against U.S-based Connectix Corp., which produces a Sony Playstation emulator. Connectix is to suspend further shipments of its Connectix Virtual Game Station emulator software for Sony Corp.'s Playstation video game machine.
  • Toyo Radiator Co., which now assembles radiators for construction equipment in the U.S., plans to begin production of aluminum automotive radiators as well by around April 2000. Its U.S. subsidiary, CoPAR Inc., will build a new factory at a Kentucky site, with initial production estimated at 300,000 units per year.
Contact Information: Morgen, Evan & Company, Inc. Copyright 1999