One day of stock declines was enough for Faber executives to cancel a whopping $ 700 million raise. Really? A little hard so break up? Is this how you run a long-term company?
By Ami Ginzburg
A small article published tonight (Thursday) caught my attention. Its headline read: “Two days after announcing a huge $ 700 million fundraiser, Faber withdrew from it.”
The reason for the withdrawal: The day after the announcement of the IPO, the company’s share fell by 13%. “Given the market conditions on Wednesday (!) We decided that raising capital does not currently serve the interests of the company and its shareholders.”
The company stated that the recruitment was not due to “necessity”. The company’s management believes that the company has a large cash register that will be sufficient for its operations. In May 2020, Faber raised $ 127 million in shares. Five months later, Faber raised another $ 460 million in convertible bonds.
So why is this news of interest to me? Because an age-old cliché in the capital market says a simple thing: “Capital is raised when possible, not when needed.” why? Because when it is needed – and someday needed – it is not certain that it will be possible to recruit.
From everything I have read about it so far, Faber is a very interesting company. It has a winning business model. The company has developed a platform that allows service providers and freelancers to give their services to casual clients. The novelty is that it opens up new markets for them, and in fact, the whole world.
For example, a video editor from London can provide services to an advertising company in Barcelona, a translator from Munich will provide a lawyer in Copenhagen, a graphic designer from Brussels will assist a writer from Milan, and a person specializing in digital media marketing can offer his services to clients in Sydney, Osaka and Moscow. This is good for service providers of course – because their market is growing. And it’s good for customers too, because the supply of service providers is growing. All of these usually result in an improvement in both the price at which the service can be purchased and the quality of the service.
Faber is a small company that directly employs only 450 people. But the platform it has developed serves tens of thousands of people worldwide. It is a living example of the immense benefits of globalization. The great growth potential (the company’s revenues have soared in the last year by 77%) has caught the eyes of investors in the past year, which helped the company’s stock soar in a year 14 times. Faber is now traded at a market value of about $ 8.5 billion – 45 times 2020 at $ 189 million. It has no profit yet, but in the last quarter of 2020 it generated a positive cash flow.
Faber is successful, growing, and very soon will also make a profit. Its growth potential is far from being realized. And yet, I have a hard time understanding why the company’s executives decided – in just two days – to give up raising $ 700 million.
And it’s not that the stock has plunged into the abyss. In total, it dropped from $ 280 to $ 240. In March 2020 it was still trading around $ 26.
Raising $ 700 million would dilute the company’s owners by a total of 8%, while at the same time making it possible to accelerate the pace of development and marketing, recruit talented employees faster, and even acquire companies and complementary technologies.
Raising capital “timing” is often a key word. Nowadays, when the markets are so bloated and the money is so available – there is no better time than this to raise capital. No one knows how much longer the celebration in technology stocks will last. Anyone who can do so raises money on the stock market and secures the future of the company for which he is responsible. And also his own future.
Memoirs of the Scroll and “Starband”
The “gridiness” (greed) that emanates from Faber’s story reminds me of the oblivion of the dot-com horror of the years ’99-2000. It especially reminds me of one of the most ambitious ventures of the time – the Starband venture, which was founded by Gilat Satellites.
Gilat, which developed miniature satellite systems for data communications (VSAT), was one of the Israeli stars of the time. At the height of the bubble, it was traded at a value of $ 4 billion. The truth – when I look at the values of contemporary hot Israeli companies like Faber, Lemonade ($ 5 billion), Wicks ($ 17 billion) or Cyberark ($ 5 billion), the value to which Gilat soared in early 2000 suddenly seems relatively modest to me.
Either way, Gilat of those years could raise almost any amount she wanted. At the beginning of ’99, it raised a whopping $ 275 million in shares. This was the largest capital raising of an Israeli company to date. This was Gilat’s fourth capital raising since it was first issued on Wall Street in ’93. In early 2000, Gilat raised $ 350 million in convertible bonds. Needless to say, Gilat’s controlling shareholders took advantage of investors’ high responsiveness to sell their own tens of millions of dollars.
The capital raised by Gilat allowed it to invest in several ventures and subsidiaries. The company, which is headquartered in Petah Tikva, has suddenly become a technological conglomerate. The markets cheered for her and her stock flew into space.
At the end of ’99, Gilat set up a particularly ambitious venture called first Gilat2Home, and then Starband. The purpose of the venture was to provide high-speed satellite internet to the consumer market in the United States. The venture was launched in December 1999 and Gilat announced that it intends to provide US consumers with an Internet connection via satellite communications at a rate 400 times faster than existing telephone lines. Its target market was 30 million households in book areas where there is almost no wired communication.
Gilat’s goal was to bring in senior partners to the venture, and later to issue it to the public. She herself was supposed to sell the communications equipment to the venture. In the first phase, it sold the equipment at very low prices to enable competitive pricing for consumers.
In February 2000, two months after the launch of the venture, the big Microsoft joined it, investing $ 50 million in Starband. In April 2000, it was joined by Ecostar, the second largest satellite broadcasting provider in the United States, which also invested $ 50 million. At the same time, ING Brings Investment Bank, which invested $ 25 million, also joined.
In October 2000, Gilat was supposed to complete the picture. “Starband” submitted a draft prospectus to raise about $ 300 million at a company value of about $ 900 million.
Oh, the timing, the timing. Have we already said that timing is important?
In October 2000, Wall Street’s technology stocks began to plunge sharply. The sharp falls have halted the IPO market. Starband paused and waited, and in March 2001 announced the cancellation of the offering. Gilat expected and hoped that the senior partnership in the venture would flow to Starband the necessary sums, but these began to lose interest in it.
Starband itself had to shell out huge sums on the equipment, but the money in its coffers was running out. In July 2001, Ecostar transferred an additional $ 50 million to Starband in exchange for increasing its holdings to 34% and actually gained control of it. 9 months later Ecostar announced that it was abandoning the venture. In June 2002, Starband filed a credit protection application (Chapter 11). Gilat’s debts were not repaid, and Gilat herself later degenerated into a creditors’ settlement.
I remember the story of Starband and Gilat well. I then covered what was happening in Gilat for the economics section of Haaretz, and I had many conversations with the company’s executives – CEO Yoel Gat, and CFO Yoav Leibowitz.
When the markets run the company
The Staffand venture had quite a few technological problems. Among them is the difficulty of making telephone calls via satellite due to the delay of a few seconds in the return of the signal from the satellite. I am not at all sure that the venture would have been commercially successful if the capital raising had been carried out as planned at the end of 2000.
But giving up raising capital “because of the market situation” was a death blow. Gilat executives who were “wizards” in Wall Street fundraising were caught unprepared. It suddenly became clear that all of Gilat’s revenue growth in the boom years was based on customers such as Starband – customers who take equipment on credit and hope they can pay for it through capital raising on Wall Street. When the tide on Wall Street ended, the company’s business model collapsed.
I do not think Faber’s fate will be similar to that of Gilat and Starband. I think Faber’s business model can carry it for many years to come. She does not need such large capital raisings to be successful.
At the same time, the speed with which such a small company is giving up $ 700 million “because of the market declines on Wednesday” amazes me greatly.
One day of declines and you fold? This? Is this how you plan to run a company in the long run?
The writer previously served as TheMarker’s Capital Markets Editor. He is currently in the final stages of writing his first book: “Value Overflow – The Lexicon of the Capital Market.” Do not see in writing a recommendation to buy or sell any securities. The author may hold positions in the securities mentioned in the article.