FairMarket Soars in Debut
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With a clean, easily understandable business model, a number of powerful industry allies and some strong street buzz, it's no surprise that online auction services outsourcer FairMarket (FAIM) zoomed off the IPO launching pad on Tuesday.
Shares of FairMarket opened at $47, or 176 percent above the $17 offer price set for the 5 million shares being sold under the Nasdaq symbol FAIM.
Sensing (and seeking to stoke) strong demand for shares as the IPO approached, FairMarket and lead underwriter Deutsche Banc Alex. Brown in the past week twice raised the offer price from the original $9-$11 range.
It wasn't such a tough call, as FairMarket's opening price indicates. Even as Internet stocks so far have endured a turbulent trading year, first-day gains for new Net offerings are averaging in the triple digits.
FairMarket generates revenues through services (one-time auction site set-up fees, monthly fees for hosting and maintaining auction sites, and customer support) and network fees (a small percentage of the sale price for items sold on the network, listing fees and merchandising fees). Last year it recorded revenue of $2.1 million against a net loss of $16.5 million.
Much of FairMarket's success rides on its ability to generate revenues through its auction site network. Last September, in a bid to challenge dominant online auction site eBay (EBAY), the company created the FairMarket Network, in which nearly 100 Web sites cross-post auction items to reach a greater number of potential buyers.
The network includes major Web properties such as Microsoft's MSN, Excite@Home (XCIT) and Dell Computer. So a computer listed on Dell's site would also be accessible by a user through MSN or any other site belonging to the FairMarket Network.
Microsoft and Excite@Home have post-IPO stakes in FairMarket of 18 percent and 12 percent, respectively, and their investment in the company no doubt is driving much of the demand for FAIM shares. But the involvement of FairMarket's two major customers and partners is a double-edged sword.
Under five-year agreements struck last year, both Microsoft and Excite@Home are guaranteed a minimum amount of transaction revenue should they meet or exceed certain targets for generating traffic to the FairMarket Network, regardless -- and this is critical -- of actual transaction revenue earned.
Here's how FairMarket explains it in its S-1 filing:
"The agreements with Microsoft and Excite currently provide for aggregate annual minimum guaranteed revenue starting at up to approximately $5.8 million in 2000 and increasing to up to approximately $28.4 million in 2004. If Microsoft and/or Excite meet their minimum annual traffic guarantees but the increase in traffic does not produce sufficient revenue to meet the minimum guaranteed revenue, we will have a financial obligation to Microsoft and/or Excite."
Since the obligation would be the difference between actual fee revenue and the guarantee minimum, it's not as if FairMarket would be paying out the full amounts mentioned in its filing. Plus it should be noted that neither Microsoft nor Excite met their minimum traffic requirements in 1999. Still, investors should be aware of t