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Tuesday, Mar 19, 2024
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No Dark Clouds Over ServiceNow’s IPO

The top executives of ServiceNow Inc. were exuberant when they rang the bell at the New York Stock Exchange for the company’s initial public offering, yet early investors, especially JMI Equity, were likely cheering louder.

The San Diego venture capital firm based in San Diego and Baltimore now owns more than $1.5 billion in stock in the company by virtue of holding a nearly half ownership in the software business, according to securities filings.

ServiceNow, which provides cloud-based information technology services to large companies, issued common stock on the Big Board recently. At the close of its first day of trading, shares were going for $24.60, or 36 percent above the issue price. As of July 5, just 6 days after the stock was issued, shares under the ticker NOW were above $25, giving the company a market capitalization of $3.1 billion.

JMI held nearly 60 million shares of NOW that gave it a 54 percent stake in the company, but following the offering, that was diluted to 49.4 percent.

Two other venture capital firms were also big winners because of ServiceNow going public. Sequoia Capital held about 24 million shares giving it about a 20 percent stake, while Greylock Partners held 2.4 million shares for a 2 percent stake. Those ownerships were valued at about $600 million and $60 million respectively.

A spokeswoman for JMI declined to comment on the ownership stake, but pointed to a securities filing that showed the firm did not sell any of its shares. Calls to ServiceNow were not returned.

Wall Street Loves Business Model

David Titus, president of the San Diego Venture Group, said ServiceNow is the type of business Wall Street loves. “It’s an extremely attractive business model because of the long-term revenue contracts it has,” he said. “When combined with the substantial growth it’s had, it becomes a very attractive investment.”

Bud Leedom, president of Leedom Asset Management, a San Diego financial advisory firm, said ServiceNow benefitted from a business model, software as a service, which is especially hot this year.

“I thought their IPO was pretty darn well received all around,” Leedom said. While the stock market is still fairly skittish for a number of reasons, it’s in much better shape this year compared with last year, he said.

Besides the venture groups represented among ServiceNow’s biggest shareholders, a few individuals also made handsome profits from their investments.

Fred Luddy, who founded ServiceNow in 2004, held some 12.4 million shares, valued at $310 million. CEO Frank Slootman, who was hired in May 2011, held about 6.5 million shares, valued at about $162 million.

The company that raised some $210 million in capital from the IPO said it plans to use the money for working capital and general corporate purposes, which may include expanding its data centers and offices.

As of March 31, the company had 729 employees worldwide. It runs its services from 16 centers located in the U.S., Canada, United Kingdom, Netherlands, Switzerland and Australia, according to company securities filings.

The business provides a host of IT services ranging from giving forgotten passwords to employees for internal networks to tracking patients on a hospital ship. Gartner Inc., a Connecticut-based technology research firm, estimated annual revenue from software as service businesses will reach $13.6 billion this year and grow to $19.8 billion in 2016, according to ServiceNow’s proxy report.

Facebook Fiasco

Among the firm’s 1,074 customers are major corporations such as Advanced Micro Devices, Barclays, Flextronics International, Kimberly-Clark, Philip Morris International and Qualcomm Inc., the report stated.

The welcome reception for ServiceNow’s shares contrasted to the sour reaction to Facebook’s IPO in May. That stock has fallen about 20 percent since it was issued.

In the second quarter, 11 IPOs raised about $7.7 billion in capital, compared with the same period last year when 14 IPOs went out and raised $1.7 billion, according to Dow Jones Venture Source.

At least one other San Diego based tech firm is planning to issue stock this year. Peregrine Semiconductor, a maker of radio frequency integrated circuits (RFIC) used in a wide variety of wireless devices is another business operating in rapidly growing markets.

According to Frost & Sullivan, the global market for RFICs is expected to grow from $12.2 billion in 2010 to $29.2 billion in 2015, according to the company’s proxy report.

Rodd Novak, Peregrine’s chief marketing officer, said he was unable to comment about the IPO except to say the company was in the pipeline and carefully monitoring market conditions. “We have kept all our S-1s (securities filings) up to date, and we have everything in place to go,” he said.

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