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IPO Lessons From the Clearwire Deal

Beware of mega infrastructure plays


Sprint Nextel (NYSE:S), which already owns about a 50% stake in Clearwire (NASDAQ:CLWR), has offered to buy the rest of the company for $2.1 billion. The deal is essentially a requirement in order for Japanese company Softbank (PINK:SFTBF) to complete its $20 billion investment in Sprint, as Clearwire has valuable spectrum assets.

On the news, the shares of Clearwire are up 14% and have gained an impressive 62% since January.

The Worst 5 IPOs of 2012
The Worst 5 IPOs of 2012

But Clearwire’s performance before that? Not so pretty. In fact, over the past four years it’s been horrible. During 2008, shares shed more than 60%, while in 2010 an 2011, the company again ended significantly in the red, with 25% and 62% losses respectively.

Clearwire, which is a provider of mobile broadband, was actually a spot-on idea, though. The mastermind of the company was Craig McCaw — a pioneer of the cell phone industry. He sold McCaw Cellular in 1994 to AT&T (NYSE:T) for $11.5 billion and Nextel to Sprint for $36 billion.

With Clearwire, he put together a great management team and focused on the WiMAX standard. McCaw also raised $900 million from Intel (NASDAQ:INTC) and Motorola, which is now owned by Google (NASDAQ:GOOG).

Then in March 2007, Clearwire pulled off an IPO. It priced shares at $25 and raised $600 million.

But if you read the company’s S-1, there were two Risk Factors that stood out. One stated:

“We do not expect to satisfy all of our long-term capital and spectrum acquisition needs through this offering. We believe our cash and short-term investments afford us adequate liquidity for at least the next 12 months, although we may raise additional capital during this period if acceptable terms are available.”

The other one said:

“We have committed to deploy a wireless broadband network using mobile WiMAX technologies under certain circumstances, even if there are alternative technologies available in the future that would be technologically superior or more cost effective.”

Unfortunately, Clearwire did have to raise additional capital, which proved to be highly dilutive. In May 2008, Sprint led a round of funding for $3.2 billion.

At the same time, the WiMAX standard was not getting much traction. The mega-carriers, like Verizon (NYSE:VZ) and AT&T, were instead focusing on LTE technologies.

In light of all this, Clearwire failed to get enough customers to be a viable business. So by March 2009, the shares hit $3 and since then, there had been ongoing concerns about the company’s ability to remain solvent.

For IPO investors, the main lesson is simple: Always be cautious about mega infrastructure plays. For the most part, they need huge amounts of capital and the technology risks are substantial. It’s a lethal combination that often results in gruesome returns for an investment.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”  Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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