It was a neat idea. But during lean times, ‘neat’ simply won’t pay the it was already public, albeit through a reverse merger into a shell company
light bills. And Hollywood Stock Exchange (HSX),
a virtual exchange that allows users to swap make-believe stocks, was a
stone’s throw away from finding a home in the dot-com boneyard. Just days
before the Santa Monica-based start-up was prepared to shutter its doors
after burning through the last of the $23 million in venture financing it
received late last year, HSX announced a whirlwind merger with Silicon
Alley-based penny stock Predict It .
The deal has all the signs of a dramatic fall from grace. Just when
armchair investors were igniting a full-blown love affair with the
tech-heavy Nasdaq, HSX offered a compelling alternative to test your skills
without using real dough. There was plenty of spillover since the equity
markets at the time were choked with retail investors trading at home on
their PCs. But since then, sexy tech stocks have cooled down; and investors
have grown disinterested with real stocks, let alone fake ones.
During frothier times, NBC showed interest, taking a stake in HSX in
exchange for some on-air promotion on its syndicated Access
Hollywood entertainment news show and its now defunct Snap.com Web property. Striking an alliance
with the entertainment giant also caused VCs to open their wallets, with
The Travelers Insurance Company betting $23 million on the concept in
exchange for a minority interest in HSX. By the time the new millennium
rolled around, HSX was the toast of the town, while already eyeballing an IPO.
In April of this year, 18-year entertainment industry vet Andy Kaplan was
named chief executive officer of HSX. Fresh off a stint as VP of Sony
Pictures Entertainment, Kaplan was one of many offline media execs putting
a toe in the water of a new economy start-up. Following HSX’ merger,
Kaplan’s lucrative stock incentives won’t be worth the paper they’re
printed on, so predictably, he’s already announced plans to jump ship
immediately after the deal is finalized.
The concept of trading stocks for fun based on your favorite movie stars
and music videos gets old real fast without any stick-and-carrot reward
like with real stocks. But more to the point, following April’s Nasdaq
meltdown, the prospects for a moonshot HSX IPO were out of the question.
That consensus, coupled with a general tightening of the belt in the VC
community, sealed HSX’ fate. Out of favor + money losing = no more free lunch.
Honestly, this deal isn’t half bad. I’ve seen plenty of upstarts with
brighter prospects go belly up, so HSX should consider itself fairly lucky.
Under the terms of the deal, HSX shareholders will receive a 57% stake in
the combined company, while Predict
It shareholders get 19%. The remaining 24% goes to a group of new
investors planning to sink $10 million into the new entity. SBS
Broadcasting and Citigroup Investments are among the sugar daddies.
Citigroup has a history of throwing good money after bad online
investments, so no surprise here.
Predict It is in the same business ballpark, founded on sports handicapping
software, and cemented with its $1.5 million land-grab of Virtual Stock Exchange last
summer. But this move really got done because Predict It has a pretty clean
balance sheet. Despite it being a penny stock, the company has a small
float and $6 million in the bank, after selling shares and warrants in
July. Sure, the dot-com made a scant $100,000 in ad revenue in its latest
quarter, but it only lost $2 million during that same period. And HSX
investors know that a merger between the two companies presents the
possibility for a decent liquidity event down the road.
In effect, Predict It has lots of synergies with HSX; but more importantly,
on the OTCBB. With HSX’ good name, investors are hoping to pump that
sagging share price up over the next year and recoup a return on their
investment. And it looks like it just might work. Shares of Predict It
popped 60% to $0.45 a share following the news. There are more than a few
Nasdaq ex-darlings whose share prices fare no better. Bottom line – I like
this deal.
Any questions or comments, love letters or hate mail? As always, feel
free to forward them to kblack@internet.com.
Want my daily missives delivered with your morning toast and coffee? Sign
up for my DealTracker newsletter.
Land Ahoy For Hollywood Stock Exchange
