The Smart Technologies prospectus starts off with a bang and gets right to the business of regaling the reader with page-turning bullishness.
It's short-lived, however. It lasts, to be precise, until page 16, when the first crack appears, and one is left with a feeling that all is not necessarily brilliant in interactive whiteboard technology, which is what Smart does. The crack, as is the wont of cracks, multiplies after that.
This is an interesting business with what might be good prospects. But is it worth 15 times EBITDA? Doubtful. It certainly doesn't leave much room for error.
Smart makes interactive whiteboards. You know what a whiteboard is. Theirs are tied in to a computer. They're the 21st century's answer to overhead projectors, their merits backed up by lots of industry-sponsored research that says it makes kids smarter - a hotly contested point among educators. But I digress.
The bankers leading this IPO think the deal will get done between $16 and $18 a share, giving it a market cap of more than $2-billion post IPO.
At first that looks okay because although the business did only $166-million (U.S.) of EBITDA (adjusted for one-time items) in its latest fiscal year, it's growing briskly. Earnings the prior year were only $91-million. (I'm using EBITDA because the capital structure, and hence net income, is changing dramatically with this IPO and related restructuring.)
That's a big jump right? Right. Until you get to page 16 and you learn that the U.S. stimulus package probably had a lot to do with it. To quote: "the education market … has been aided by various government economic stimulus programs in fiscal 2010 as governments undertook spending initiatives to improve public infrastructure and to help alleviate the effects of the global recession. We believe these programs have supported the growth in technology spending in education and the adoption of our technology in several markets. If technology spending in education decreases, it may adversely impact our revenue."
What we don't know is by how much the company benefited from stimulus spending. Sales in fiscal 2010 were up 38 per cent.
The State Fiscal Stabilization Fund - part of the 2009 stimulus package - has almost $50-billion to ladle out to school systems in the United States. Education sales make up 85 per cent of Smart's revenues and 71 per cent of its sales are in North America. The company has 61 per cent of the U.S. market.
So while I can't figure out how much stimulus money was spent on technology ($650-million is specifically earmarked for that but it could be more), let alone interactive whiteboards, it's clearly an important source of revenue for Smart. And it will be again this year. But then the gravy train stops.
I wonder if that played a role in the timing of this IPO? Or in the timing of Promethean World PLC's IPO on the London Stock Exchange four months ago?
Promethean is a big competitor. They share a backer in Apax Partners, which sold down its stake in Promethean and is doing the same thing here. Promethean is down 20 per cent since its IPO.
Mitigating all this, to a limited point, is that sales were also up sharply in fiscal 2009 - 24 per cent - without the benefit of government gifts. And, it should be noted, that while a couple of the funds that own a piece of Smart are selling some of their stock in this IPO, the founders are not. That said, in 2007 the company borrowed $800-million to pay a distribution to shareholders. I don't think they have much skin in the game any more, if any.
Still, one wonders about valuation. Smart has sold a lot of stock to employees over the past 10 months at a weighted price, adjusted for a reverse stock split, of about $2.40 a share. That price was based on professional valuations. The prospectus has lots to say about why the shares are worth more today. You can read it for yourself. I'm somewhat skeptical.
Still, Smart has conducted good business on almost every front, or so it seems from reading the prospectus. The product makes sense even if you've never used one and there are lots of school rooms and board rooms in the world that don't have one but could. There are also lots of companies vying for market share and all the risks that come with technology.
The IPO might do well at first, especially if more stimulus spending flows Smart's way. But I'd be very mindful about the above.