There is a dark cloud hanging over the upcoming $36m initial public offering by decision support software company MicroStrategy Inc. Merrill Lynch & Co and Hambrecht & Quist have signed on to manage the offering – due within the next two or three weeks – but the two banks arrived in their current positions after some unsatisfactory dealings between the company and other potential partners. Goldman Sachs, which was set to co- manage the offering, according to sources, was apparently fired by MicroStrategy after raising concerns about dubious accounting practices and misrepresentation of the company’s business. Goldman was concerned over the issue of software capitalization in the company’s financials, something that can be done to create artificial profit. It was also concerned about the fact that services were apparently too high a percentage of the company’s total revenues – nearly 32%. Research and development spending also appeared to be abnormally low, only about 9.5% of last year’s total operating expenses. When the bank voiced its concerns about the apparent irregularities, MicroStrategy sent it packing. Deutsche Morgan Grenfell walked away from the IPO over similar concerns. DMG first pitched the business to MicroStrategy in November and was asked by the company to co-manage the offering but became skittish over the issues that Goldman had raised and passed on the business altogether. Lead manager Merrill has a less than sterling reputation when it comes to taking software companies public, according to some industry analysts, which lends credence to claims that some of MicroStrategy’s would-be first choices had lost interest in the deal. When asked about the selection of managers for the IPO, a source at MicroStrategy admits that it considered DMG, but that the bank didn’t make it past the first round of deliberations. He asserts that he was impressed with them but that, at the end of the day, the equity desk at the bank’s technology group was unproven and too green. He also admitted some degree of trepidation over rumors that the DMG technology group was up for sale to the highest bidder – something that it has staunchly denied. DMG, for its part, has admitted to losing at least two deals over those concerns but insists that it did not come into play with regard to MicroStrategy. As for Goldman Sachs, the source – who asked not to be named – said there was no special reason why it wasn’t involved in the offering and insisted that there was no truth to the notion that the company fired the bank. Sanju Bansal, MicroStrategy’s executive vice president and chief operating officer strongly denies suggestions that DMG resigned the account due to disapproval of MicroStrategy’s accounting policies. Bansal insists the disagreement between the two was over DMG’s valuation of MicroStrategy, which he says was too low by all comparable industry standards. MicroStrategy, he says, is one of the bigger and more stable companies to go public for a while, and the company waited until it had the right team and business model in place, as well as a profitable European operation up and running, before going to the market. It was not interested in a valuation that would put the shares out too low, only to see a 50% hike on the first day of trading, according to Bansal. He asserts that the company wanted to steer clear of a common practice whereby companies go out under-priced, and make large short term gains for the new shareholders, to the detriment of the company’s balance sheet. MicroStrategy says it is looking for investors who are interested in the longer term picture. While Merrill Lynch is not seen to be as strong for technology flotations as DMG, Bansal says it has a good technology practice, words that don’t smack of confidence. The wrangling over who will take the firm public comes at a time when there have also been some concerns over the strength of MicroStrategy’s product offerings, as a few analysts told us that some of the company’s customers have found its software systems hard to get up and running. Rumors
have circulated that one of MicroStrategy’s major European customers is extremely dissatisfied with the company’s products, and the possibility of legal action was raised. Another potential impediment to MicroStrategy’s business is compatibility issues with the soon- to-arrive Plato on-line analytical processing (OLAP) server from Microsoft Corp, which is expected to cause problems for companies who have concentrated their efforts mainly on the server side of things, such as MicroStrategy. The company filed its S-1 form for the public offering with the Securities and Exchange Commission in April, after having openly postponed any action in February, citing a nervous market for technology shares exacerbated by the financial troubles in Asia. For fiscal 1997, MicroStrategy reported total revenues of $53.6m, up 136.9% year-over-year and net income of $121,000. Given the effect of corporate income tax, which the company was not yet liable for, it would have posted a net loss of $368,000.
