BigBand Networks, Inc. (NASDAQ: BBND) is looking to be one of the poorest IPO’s of 2007. Management has lost credibility with the underwriters and with analysts that initially gave this favorable coverage. Amir Bassan-Eskenazi is Co-Founder, Chairman, Chief Executive Officer and President. Sometimes the founders of a business need to ultimately step aside to let in stronger operators and that appears to be the case over at BigBand. If you read further on they have at least named a COO, but BigBand needs to loosen up the tight control that is appears to be present. We’ve called this guy out before.
This is not necessarily the worst IPO of 2007 if you can believe it, but it was one of the most easily recognizable out of the losers considering the "hot" IPO status at a cautious time. In fact, its network-based platforms that enable cable operators and telephone companies to offer video, voice, and data services across broadband and legacy networks had been discussed by some as a possible challenge to Cisco Systems (NASDAQ: CSCO) down the road and on a limited basis. Because of a sharp focus we aren’t sure that was really the case, but their pre-IPO and post-IPO indications were quite strong. As it turns out, the only challenge this has posed was an investor loss test to see if investors could lose more money buying BigBand stock or by purchasing CDO’s blindly.
Shares rose to just over $20 before summer after its "hot" IPO in March and two underwriters gave positive recommendations with a "buy" rating and an "outperform" rating. Those look like ancient history if you read them now. The company disappointed in late summer as not being good enough for a recent hot-IPO, but then it posted results that failed to impress again since then. The stock has never recovered and the analyst reports aren’t exactly a great courage builder. Even its recent announcement of "five contract wins in China" has failed to attract the "China hype" traders.
On October 30, BigBand announced a restructuring plan "to increase its efforts on video networking." As part of its plan, BigBand said it would reduce its workforce by 15% and retire its Cuda CMTS platform. Is that the success a post-IPO company wants to signal?
Simultaneously the company announced that its general manager of product operations, David Heard, would become its C.O.O. and assume combined responsibility for research & development, marketing, sales, services and operations. Heard joined BigBand earlier in 2007, after having leadership positions at data and telecom companies, including Tekelec, Lucent, AT&T and Somera Communications. The potential good news is that at least shareholders have a shot at putting him in charge IF they can march the CEO out.
Class action settlements (looks like 4 class action suits) are a potential threat to the $140+ million cash on the books, so don’t even use the market cap to net cash metric to derive if BigBand has become a "value stock" or not. It isn’t. The short interest on last look was over 2.3 million shares.
Because of the series of disappointing earnings and the lowered guidance and losses posted, we do not even know if the First Call estimates ahead are worth as much as toilet paper. Estimates have come down drastically and its forward P/E is still over 100. The point that some key orders didn’t go through has merely shown that this is just a big risk in investing in stocks where one or two contracts make or break a quarter. From our view don’t have any assurances that they will be profitable ahead, although there may be some negative personal opinion there that isn’t in agreement with the company’s management. But we’d argue that morale is probably only high among the sales staff when they are at happy hour.
Amir Bassan-Eskenazi might, and we key on might, be able to satiate hostile shareholders by merely loosening up on some of his titles with a stronger operations team if he isn’t willing to leave outright and just hold his shares. We are also not certain that a disgruntled base of shareholders would greet an outright departure with open arms because it could signal even more trouble. So we’d suggest that Amir Bassan-Eskenazi keep the Chairman role and go find a real ball-buster of an action hero that can assume all of his operation roles that aren’t handled by David Heard. Because of insider ownership and alternatives we believe the board could take if it wanted, he has to willingly do this or the effect could take this one further south. Wanting someone out doesn’t mean they can be automatically outed, even if they have done a poor job.
We haven’t calculated or been able to make a ‘guestimate’ on what his outright and complete departure would be worth because it may be viewed as a drastic signal. But if they do have decent technology that can be sold and is actually competitive to others on the market, then it’s at least time for the founder to become more of an oversight position rather than the operator.
Shares sit at $5.71 today, and its short post-IPO trading range is $5.47 to $21.63.
GUIDELINES FOR OUR CEO SELECTION
Jon C. Ogg
December 6, 2007
Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.
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