CDC Software Corp is hoping to ride the wave of well-received Chinese public stock offerings in the United States, but its estimated $57.6 million IPO could be hurt by weakness in the market for corporate software.
CDC Software, a unit of CDC Corp, makes business software applications that it says can help customers increase revenue and control costs by automating business processes and easing access to critical information.
But it recognizes that in tough economic times the benefits that come from its products may not be enough to induce companies to spend.
Decreased capital and maintenance spending could have a material adverse effect on the demand for our products and our business, results of operations and financial condition, the company said in its prospectus.
In addition to spending cutbacks by its customers, CDC Software said it faces risks from competition from a broad mix of industry heavyweights such as Microsoft Corp, Oracle Corp and SAP AG.
If you look at the top-line trends, the business isn't doing well. The numbers aren't great and with these global economic conditions, they aren't likely to rebound soon, said Francis Gaskins, who analyzes IPOs for IPO Desktop.
CDC Software estimated revenue of slightly more than $50 million in each of the first two quarters of 2009, according to a filing with the U.S. Securities and Exchange Commission.
The difficulty we face is that investors are looking for strength, not just something of promise. With a revenue stream of more than $240 million, there's not a lot going to the bottom line, said David Menlow, president of IPOfinancial.com.
CDC Software lost about $1 million last year, according to its SEC filings.
SMALLEST OFFERING OF THE YEAR
CDC is offering 4 million American depositary shares that are expected to price during the week of August 3. A selling shareholder is offering an additional 800,000 ADSs.
The shares are expected to price between $11 and $13 each. The company said it expects net proceeds of $43.4 million, based on the midpoint of the expected price range, according to the SEC filings.
If CDC Software's IPO launches it will be the smallest of the year in dollar volume.
CDC plans to use the net proceeds for general corporate purposes, including expanding sales channels, funding working capital, research and development, and possible acquisitions.
After the IPO, CDC Corp will indirectly own 98.1 percent of the voting power and 83.4 percent of the ordinary shares, according to its filings.
If Hong Kong-based CDC Software's IPO launches as planned, it will be the fourth IPO by a Chinese company on a U.S. exchange this year. That marks a renewed confidence and interest in Chinese companies among U.S. investors after an eight-month period between August 2008 and April 2009 during which they completely shunned foreign IPOs.
So far, that confidence has been rewarded. Two Chinese companies -- online video game maker Changyou.com Ltd and water treatment equipment supplier Duoyuan Global Water Inc -- have put in strong performances, each jumping nearly 40 percent in their first day of trading. Both continue to trade well above their IPO price.
CDC Software would be the second spinoff of a Chinese company to go public on the Nasdaq this year. Changyou.com was spun off from Internet portal Sohu. Investors' risk aversion is typically mitigated somewhat by knowing the track record of the parent company's stock.
Being a Chinese company, it is more intriguing but there's also more caution, said Jay Ritter, professor of finance at the University of Florida.
Lazard is the lead manager of CDC Software's IPO. Lazard has been a lead manager for only four IPOs since 2002, with three of those offerings in the healthcare sector, according to data from Thomson Reuters.
That could raise some concern among investors looking for a more experienced book-runner, analysts said.
Investors want to know that the lead manager has the history to lead the IPO and get the shares in the right hands and show some management, Menlow said.
(Editing by Steve Orlofsky and Ted Kerr)