Consequences of the Social Media Tech Bubble - Will Digium, Fonality, Metaswitch, Ooma IPO?

By Doug Mohney May 24, 2011

LinkedIn’s doubling of its initial public offering stock price has Wall Street analysts looking back to the dot com bubble of the last 1990s, according to the New York Times.  At the close of trading last week, LinkedIn shares were trading at around $93, putting the on-paper value of the company at more than $8 billion -- for a company that made only $15 million in profits last year. 

All that money floating about is pumping speculation that Groupon could be valued at $20 billion and Facebook could go for $80 billion or more. You can expect a lot of companies who were thinking about an IPO start to rush towards one, because the stacks of money are so high. Expect to see Twitter, Zynga, and other social media companies start to file paperwork and prep for their days of cashing in.

But it won’t be just social media companies tempted by the cash. Anyone with a spinnable tech story has to be thinking about cashing in; solid-state storage manufacturer Fusion-io is looking at being priced at more than $1 billion, despite a net loss last year of $31 million and a highly erratic sales cycle. 

It wouldn’t surprise me to see IP telephony names like Digium, Fonality, Metaswitch Networks, and Ooma test the waters of Wall Street to raise cash.  Investors want to cash out, employees would like liquidity for stock and options, and management always likes to have cash on hand to pump into organic growth and acquisitions. With one side of Wall Street running a fever for more IPOs after years of drought, the next six to twelve months might be an opportune time to take a break-even or profitable company public in order to collect as much capital as possible while the markets are favorable.

All bubbles, however, must come to an end.   For companies, the trick is to IPO at the peak of a bubble, collect as much cash as possible, and then turn a profit (if not already) and steadily grow the business once the bubble pops. Initial IPO shareholders who didn’t “flip” the stock at the height of the bubble will be mad, but there’s not a whole lot the company can do about it, short of not actively appearing to promote insane stock prices. 

The nice part about going IPO and collecting a large mound of cash is that it gives a company the opportunity to buy up/buy out competitors, diversify product lines, and pay down/pay off debts. Well-managed companies will grow bigger and become more profitable, which is the name of the game when it comes to business. 

Such a decision does come with some risk. Spending the money to prepare for an IPO -- bankers don’t work for free and they get their fees regardless of what the stock price is -- isn’t cheap. If the bigger economic picture shifts and/or the social media tech bubble bursts, the IPO window could shut in short order, leaving employees disappointed after a lot of hard work. For companies that are losing money, a failure to execute an IPO could result in the ultimately failure of the company.

Want to learn more about the latest in communications and technology? Then be sure to attend ITEXPO West 2011, taking place Sept. 13-15, 2011, in Austin, Texas. ITEXPO offers an educational program to help corporate decision makers select the right IP-based voice, video, fax and unified communications solutions to improve their operations. It's also where service providers learn how to profitably roll out the services their subscribers are clamoring for – and where resellers can learn about new growth opportunities. To register, click here.

Doug Mohney is a contributing editor for TechZone360 and a 20-year veteran of the ICT space. To read more of his articles, please visit columnist page.

Edited by Jennifer Russell

Contributing Editor

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