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Friday, August 04, 2006

"Creative Financings in a Post-Bubble World"

Stock Tickers: CROX, CMG, SVI, DEX, MCD, Q

After the Bubble Burst

Here we are six years after the burst of the internet bubble. The business world has changed since the Super Bowl in 2000 when 17 Dot-Com companies each paid $2 million for 30 second spots. That same year the Nasdaq Index reached 5000 having doubled over the prior twelve months. Then the bubble popped bringing the market down
to just over 1100 two years later. Startups like etoys, and webvan were going to change our lives but later disappeared as soon as their venture capital money was gone. Our firm had a ring side seat having advised several dot com companies including a travel company that Business 2.0 included on its List of 100 Top Internet Companies.

The stock market has largely recovered for long term investors. Exorbitant prices paid for initial public offerings (IPO’s) of internet startups have disappeared but the equity markets can still be lucrative for companies with a proven track record.

In this article I will highlight four success stories that created immense wealth for their owners. Three are about talented unknown business people; one that went directly to the public market through an IPO (Crocs), one that was acquired by a large corporation (McDonalds) and then went public (Chipotle), and one that was acquired by a well funded publicly traded blind pool (Jamba Juice). I will then cover an old line business (Yellow Pages) that was purchased from a large corporation (Qwest), went public and was later sold (Dex Media).

Crocs (CROX)

This tale begins in 2002 when Colorado entrepreneurs discovered a strange looking clog developed by a Canadian company named Fin Project NA. The shoe was made of a resin that resisted bacteria and fungus and comfortably molded to your feet at body temperature. Started as a shoe for boaters, Croc’s success stemmed from its comfort, its style and its functionality. The first year in business sales were $24,000. This year sales will exceed $200 million. In February, 2006 the company sold $240 million worth of stock in the largest public offering for a footwear company putting a value of over $1 billion on the company. One key to their success was the acquisition of Fin Project who owned the unique resin and allowed Crocs to protect its proprietary designs.

Chipotle (CMG)
This Colorado success story was started near the campus of the University of Denver in 1993 by Steve Ells. Inspired by Mexican tacquerias, Ells focused on fresh ingredients
prepared in front of the customer and capitalized on consumers demand for a healthy alternative to fast food. After raising $1.8 million through a private placement which was used to build the first 14 restaurants, Ells sought a partner who believed in the brand and could help finance its growth. At the same time McDonalds was looking for new food concepts to leverage its expertise as fast food burger sales were slowing. McDonalds initially purchased a minority interest in Chipotle in 1997 and by 2005 owned 92%. In 2006, with 504 locations, Chipotle completed an IPO raising $170 million at $22 per share. On the first day of trading the shares doubled to $44 per share. Five months later McDonalds sold 4.8 million shares of its Chipotle stock at $61.50 per share for almost $300 million while retaining 50% of the stock.

Jamba Juice (SVI)

Jamba Juice was started in the central California town of San Luis Obispo in 1990 by Kirk Perron. Jamba was the leader in the smoothie industry that took advantage of the USDA’s recommendation that people eat 5 servings of fruit and vegetables per day.
By 2006 the chain had grown to more than 500 stores nationwide with locations at Whole Foods Markets and other high traffic sites.

With the option of going public via an IPO similar to Crocs or selling to a large corporation as Chipotle did, Jamba took an unusual path. In March 2006 they announced a merger with a publicly traded blind pool named Services Acquisition Corporation Int’l which is traded on the American Stock Exchange under the symbol “SVI.” This blind pool went public in 2005 and raised $127 million. The terms of the deal include the payment of $265 million to Jamba’s shareholders. Merging with blind pools are increasingly seen as an alternative to the traditional IPO as a method for going public.

Jim Cramer of Mad Money recommended the purchase of SVI one week after the merger was announced. Since then the stock has traded up from $7 to $13 per share. Shares are now back around the $9.00 levels and closed Thursday at $9.17.

Dex Media

Uncovering hidden value in slow growth businesses can be brought to an art form by large equity funds. Such was the case when the Carlyle Group and Welsh, Carson, Anderson and Stowe purchased the yellow page directory business from Denver based Qwest (Q) in 2003 for $7.1 billion.

With the directory business growing at less than 4% per year, Qwest believed this was a good strategy to reduce some of the enormous debt incurred during the tenure of Qwest’s former CEO Joseph Nacchio. Qwest failed to realize how valuable their asset was. The internet is becoming the primary way consumers find sellers and locate products. Directories that are able to include both printed phone books and search engines are the ones that will succeed.

Greg Sterling of the Kelsey Group stated that directories should not be seen as a wasting asset. This theory was proven to be correct when the newly named Dex Media conducted an initial public offering in 2004 raising $1.01 billion in Colorado’s largest ever public offering. Later that year the new owners of Dex sold $633 million worth of their shares and in 2006 they sold the company to R.H.Donnelly for $9.8 billion.


While some of the IPO market is realistically closed for most companies due to lack of size and profitability, the equity markets are available in various creative ways so long as the company has substantial growth, size and earnings. This is in sharp contrast with the shattered dreams of the internet bubble where people were raising money solely on the basis of an idea and projections.

by outside contributor Allen Goldstone

Allen Goldstone is a Colorado based consultant that specializes in mergers & acquisitions and corporate turnarounds.

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