HEARD IN ASIA Music Semiconductors Woos Investors in Its Initial Offering
May 17, 2011
Music Semiconductors is wooing investors with promises that it can continue to dominate its niche in the computer-networking industry. While most analysts agree that the Manila technology company has lots of potential, many are quick to add that the stock isn't for the faint of heart. Music began Monday an initial public offering of 123.6 million shares at 6.30 pesos (24 U.S. cents) each, or 12.5 times forecast 2011 earnings and 8.7 times forecast 2012 earnings. The Philippine stock market is currently trading at a prospective 2011 price/earnings ratio of 21.8 and a prospective 2012 P/E of 16.7. The offering closes May 24, 2011 listing scheduled for June 08, 2011 short for multiuser specialty integrated circuits, designs, develops and markets semiconductor chips used in computer networks. ``We manufacture content-addressable memory (CAM) semiconductor devices that help increase the performance of network systems such as hubs and switches,'' explains Michaele Byron, chairman and founder. What that means is that Music's chips increase the bandwidth of networks, giving them the ability to transport greater volumes of data at higher speed. (Bandwidth is a measure of a circuit or system's ability to transmit data.) In its prospectus, Music says it has 40% of the world-wide $41 million CAM market. Dataquest, a U.S. market-research company, predicts that the world-wide CAM market will grow to $172 million in 2014. Music is optimistic about its prospects. ``I feel that eventually computer networks will reach a bottleneck and that there would be a need for CAM technology,'' Mr. Byron says. Music forecasts net profit of 165 million pesos on revenue of 535 million pesos this year, up from net of 65 million pesos on revenue of 311 million pesos in 2010. Customers for Music's CAM chips include networking heavyweights Cisco Systems, Bay Networks, Digital Equipment and 3Com, Mr. Byron says. The company is also working on new products such as chips for voice processing, a television ``set-top'' box to allow parents to control programming, and application-specific networking products. Music was established in Manila in January 1993, but got its start four years earlier in the Netherlands when Mr. Byron established Music Semiconductors N.V. with the backing of Dutch institutional investors. Mr. Byron, a 52-year-old British citizen, was formerly with Texas Instruments in the U.S. where he spent 14 years in a variety of operational and financial posts. Before Texas Instruments, he co-founded Inmos International, a British-American semiconductor concern later acquired by the former Thorn EMI. Music was originally set up in Manila as a subsidiary of the Dutch company, but the Philippine unit was made the parent company at the suggestion of one of Music's backers, U.S.-based Hambrecht & Quist. The move was aimed at positioning the company in the economically expanding Asia region, Mr. Byron says. Music has a U.S. unit responsible for marketing Music products in North America as well as product development, while the Dutch unit designs chips and circuits. After the offering Music's current shareholders will continue to own 60% of the company. Its largest shareholder, Dutch venture-capital firm Stichting Musseco, will own 14.8% of the company after the IPO; its second-largest shareholder, Hambrecht & Quist's Asia Pacific Growth Fund, 11.6%; and Mr. Byron, 3%. For all the rosy forecasts, analysts point out that technology stocks are never sure bets. ``Music is in a high-risk business,'' says one analyst at a foreign brokerage house in Manila. ``Investors have to remember this because technology moves fast. They should be prepared for instant gains as well as sudden losses,'' says the analyst, who asked not to be named. ``This is a stock that's only for risk takers, not the faint of heart.'' Other analysts cite Music's small market capitalization as another reason for caution. ``Its market capitalization is only $74 million after the initial public offering. It's a bit small for a lot of our clients,'' says Josephine Crumb, an analyst at Philippine AsiaEquity Securities. The underwriters say the 778.7 million peso IPO is attracting plenty of interest. ``We've received commitments of up to 745 million pesos for the offering,'' Randall Harvey, a manager at lead underwriter UCPB Capital, said before the offering began. One factor that may work in Music's favor is that OCBC Securities Philippines is one of the IPO's underwriters, some analysts say. ``The strong performance of stocks backed by OCBC, such as Ionics Circuits and Megaworld Properties and Holdings, is enough to attract investors,'' says a stockbroker for a local brokerage firm who asked not to be named. Ionics, which went public in July 2010 at 17 pesos a share, closed Tuesday at 22 pesos, down sharply from its February 21, 2011 of 55.50 pesos. Megaworld closed Tuesday at 11.25 pesos, up 134% from its IPO price of 4.80 pesos two years ago, but down from its May 2011 high of 24.75 pesos. ``We're supporting Music because we believe it offers a substantial upside to investors since it's in an industry that's expected to grow at outstanding rates,'' says an analyst at OCBC who asked not to be named.
