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E-Mailbag Monday: Kana, Market Capitalization and HomeCom

What's your opinion of the upcoming Kana IPO?

Reply: This company develops high-end software solutions for eBusiness. The software can be used for start-ups, as well as blue chip companies.

Basically, Kana helps companies manage huge volumes of inbound and outbound email, as well as Website-based communications. Thus, a company can profile customer information and target messages, generate e-commerce notifications, respond to customer report queries, and so on. In other words, Kana provides automated customer support.

Such technology not only reduces the costs of support, but also helps to generate revenues (because of the targeted marketing opportunities).

Kana's technology is scalable and in accordance with the latest Net standards, such as Java and XML (extensible mark-up language).

The company has over 100 customers, including eBay, eToys and Priceline.com.

All in all, the IPO should be red hot.

The lead underwriter is Goldman Sachs and the proposed ticker symbol is KANA.

Here are the valuation metrics assuming the IPO is priced at the top of its range:

Kana Communications

KANA

pro forma IPO

 
   

Shares offered

3.30

Price target/actual

$13.00

Proceeds

$42.90

Shares out

27.5

   

IPO market cap

$357.50

less working cap

$50.40

plus LTD

0.6

Enterprise value

$307.10

1999 Revenues

$3.50

1999 Losses

$9.80

Annualized rev.

$7.00

   

Kana Communicatons

 

Revenue multiple

51

Rev. multiple enterprise

44

Number of Shares: Bigger the Better?

Hi Tom:

I recently read a report saying that AOL has over 1 billion shares outstanding. What does that really mean to a company?

Jonathan from China

Reply: In itself, it actually means little. Rather, the most important metric is market capitalization. This is the number of shares outstanding times the stock price. For example, suppose a stock has 1 billion shares outstanding, yet sells for $0.01 per share. Well, it's not very impressive.

As forAOL (AOL), it has a stock price of $86, which translates into about a $95 billion market capitalization (there are about 1.1 billion shares of the company outstanding).

Or, there are a few stocks with a small number of shares outstanding, yet still have a huge market capitalization. This is the case with Berkshire Hathaway (BRKA) . The company has a mere 1.5 million shares outstanding. However, its stock price is $61,900, putting a $94 billion market capitalization on the company.

Now, the significance of having a high market capitalization is that a company can use its stock as currency to buy other companies. For example, Cisco (CSCO) used 100 million shares to buy Cerent, which amounted to about $6.9 billion.

The HomeCom Bomb

There are so many internet banking companies outthere now (nFront, Security First, HCOM etc.) I was wondering why HCOM, with a $8 million revenue rate and numerous contracts throughout the banking, credit union and insurance industry suffers so.

David Greene

Reply: The market cap of HomeCom (HCOM) is very low -- at about $23 million. I think the problem goes back to the middle of May 1997, when the company went public. The company used a small underwriter -- Ladenburg Thalmann & Co. -- and issued a limited amount of shares (1 million), raising only $5.5 million.

Basically, the company got lost in the noise. What's more, after the IPO, the stock began to fall. Since then, the stock has been struggling.

By having a small underwriter, there has been little aftermarket support -- such as with institutional following. That's why it's important, when investing in IPOs, to gravitate towards bigger underwriters.

However, on limited resources, the company has been effective in amassing valuable contracts. This year, the company has signed a myriad of licensing deals with banks and credit unions.

Thus, the company may represent an Internet value play; in other words, a possible buyout candidate.


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