Taking a Bankrupt Company Public

One of the defining features of the dot-com bubble was the long line of loss-making companies coming to market with IPOs. That all came to an end when the bubble burst, and right now nobody is coming to market with an IPO. Nobody, that is, except Friendfinder Networks. Which not only is losing lots of money: it’s also in default on its debt.

Just check out the prospectus: in the first nine months of this year, the companyhad a net loss of $32 million, after losing $50 million in 2006 and $30 million in 2007; its accumulated deficit now stands at $131 million. Right now its total liabilities of $691 million significantly exceed its assets of $647 million, which means that shareholders’ equity is negative. Oh, and there’s this risk statement:

Our financial statements include an explanatory paragraph concerning conditions that raise substantial doubt about our ability to continue as a going concern, and there is no guarantee that we will be able to continue to operate our business or generate revenue.

Friendfinder Networks has exactly one asset that anybody has any interest in: lots of (mostly insalubrious) web traffic. Just like during the dot-com boom, we’re being asked to ignore the P&L, and concentrate instead on the the eyeballs — or, as they’re known now, visitors. But unlike the dot-com boom, there’s also that debt to worry about.

If anybody really wanted to own Friendfinder Networks, all they would need to do is buy up its bonds, refuse to modify the covenants, accelerate the debt, and force the company into bankruptcy, where it would be handed over to its creditors, with shareholders being wiped out.

Given that very realistic scenario, it’s very hard to see why anybody at all should be interested in participating in this IPO. As Floyd Norris says, you don’t need moral squeamishness to stay away from this: there are "plenty of other reasons for investors to shy away".

Is Renaissance Capital really underwriting this offering in the old-fashioned sense that it’s promising to buy any shares which nobody else wants to touch? What does Renaissance intend to do with such a large slug of worthless equity? Something weird is going on here, because I simply can’t see why anybody thinks this IPO can get off the ground — especially in this market. But maybe that’s why I’m not a banker in equity capital markets.

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