What am I Bidz for Some Cubic Zirconia?
With Omniture bleeding and Vonage grumbling that, darn it, my head must be around here somewhere, the tech IPO market turns its lonely eyes to Bidz.com. The suburban LA-based auction retailer of mostly inexpensive jewelry is expected to price this week somewhere between $8 and $10 a share. The deal stands as a test of its lead banker, the San Francisco emerging-growth boutique ThinkEquity Partners. ThinkEquity CEO Mike Moe, whom I like and admire (Logrolling alert: Moe tells me I'm getting a small plug in his coming book), is passionate about the idea that companies like Bidz need to be able to access U.S. capital markets even if they're smaller, riskier or less glamorous than companies big power banks want to back in the wake of the Web bust. Now's his chance to prove he's right.
There are two ways to look at the Bidz deal. One is my way. The other is the way I heard yesterday from a money manager who doesn't like it. I report, you decide.
The bull case: Bidz may look a little ridiculous with that funny spelling and a cheap-looking site, but it makes money. Despite an average order size of only $112 -- about a tenth that of online jewelry leader Blue Nile -- Bidz captures about 7,000 orders a day. In the 12 months ending March 31, it had $105 million in sales and made $4 million -- $3.2 million of it in the first quarter, when it grew sales 70% to $34 million. They spend bubkes on marketing. And its market cap stands to be only about $282 million at the current range. (Compare that, for example, to Omniture trying to get a $425 million market cap with only $43 million in 2005 revenue and no profit).
I think in analogies, and the one I think of here is Provide Commerce. Provide, which runs Proflowers.com, was a 2003 IPO that went from a deal price of $13 to $15 on the first day and ultimately sold out for about $33. They also had about $4 million in trailing profits when they went public, on about $90 million in revenue.
Of course, Provide was run by a smooth ex-Intuit executive who struck people as a disciplined guy. I met some Bidz execs over the phone when I did a 2002 story about profitable, or soon-to-be-profitable, Web companies that didn't want to go public. The one guy I kind of remember -- don't ask me his name -- struck me as a fast-talking, maniacally focused guy totally into making money. I dig that in a CEO. But a lot of management at Bidz can strike people as a little nutty. Even Moe admitted that, with a laugh, when I saw him in May. There's a certain stripe of entrepeneur who's just so into his or her business that they don't always know when to shut up, and Bidz CEO David Zinberg is said to have some of that streak. Hence the bear case...
* There are a lot of related party transactions. About 37% of Bidz' merchandise is supplied by a company called LA Jewelers. That company's owner holds 1.2 million shares of Bidz.com (that's 5.2% of the pre-IPO shares outstanding). The CEO's sister works for the company. The VP of operations is married to the CFO. Bidz also paid $150,000 last year to a tech consulting company co-owned by its VP of Technology. Nothing illegal, just things that make the company look a little incestuous to my source.
* They finance their business partly by postdating checks. I've never read this in an SEC filing before (maybe I've missed it elsewhere), but Bidz oftenpays for merchandise by issuing checks backdated for up to 60 days. That ends up on the company's balance sheet as "bank overdrafts" -- more than $6 million worth at last count. It's harmless enough when you read about the details -- unraveled, it's just a way of being given 60 days' trade credit -- but it looks really odd to see such big numbers on a balance sheet under "overdrafts."
* Their predecessor company was a pawnshop. And bail bondsman. Even for a company that competes with Overstock.com, that's a little much.
* There's a little bit of sketchy SEC history. Bidz' S-1 discloses that its private stock sales between 1999 and 2003 didn't comply with federal regulations governing when companies can sell securities without registering them with the SEC.
(May I kvetch here? This is especially ironic, I can add as a former law student. Law students memorize rules by using acronymns. The rule for when securities must be registered is the ICE rule: You go to the SEC when you're proposing an
Investment in a
Common Scheme, with the
Expectation of Profit from the efforts of others.
If ANYONE should remember the ICE rule, it's a jewelry company!...For God's sake! Anyway, I digress).
The upshot is that Bidz has offered to buy back those shares for $40 million. It struck my money-manager source as a sign of bad management, and a potential liability. I think the former was more bothersome to the manager than the latter.
* They're more expensive than Blue Nile. The money manager I spoke to put Bidz' valuation range at 37 times cash flow, versus 22 times for Blue Nile. "I think it will get cut in terms of pricing," the manager says. Right after the manager said, don't quote me.
* Most of all, they sell cheap jewelry. You can find some nice stuff on Bidz.com -- this very morning, I watched people bid against each other for a bracelet Bidz says is worth $4449. The bidding began in the last 15 seconds of the auction and ran the price from $122 when I began watching to a sale price of $491. I also saw a Mickey Mouse watch on their front page. "Blue Nile sells real stuff, engagement rings," my source huffed. "As opposed to stuff (at Bidz) Zale wouldn't touch." Ouch. Then read the S-1, which cheerfuly discloses that Bidz often buys bling that is so overstocked that the liquidator's alternative to dumping it through Bidz.com at low prices is to melt it down and recycle the stones. It makes Overstock look upscale.
So the question is this: Does Bidz perform an economic service by giving LA Jewelers and others a better alternative to melting down jewelry? Or is it just selling kitsch? The IPO turns on that.
You know the part about, I report you decide? I lied. I called Mrs. Dealflow, asked her to look at the site and tell me what she thought. I'll let her decide. Her verdict: There's some nice stuff there, but she has no idea if it's worth as much as Bidz says it's worth -- or if the discounts are as big as they say. Then she asked the real question: "Why do you ask? Are you buying me something?"
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