Asia Online files to raise up to $100 million in Nasdaq IPO

Asia Online has filed to raise $100 million in a Nasdaq IPO, setting the stage for a sharp battle with rival iAsiaWorks for dominance in Asia''s growing market for internet services.
Kevin Randolph, chief executive of Asia Online, an internet services company that today filed to raise as much as $100 million in an initial share sale on Nasdaq, is not the kind of guy to leave things to chance – at least not when it comes to money.

Randolph's office, on the 16th floor of Hong Kong's International Financing Centre, looks out over a sweeping panorama of Victoria Harbour, bustling with junk-boats, tugs and ferries. Randolph sits with his back to it. Instead, he faces a plain wooden door and a decorative, three-foot-high waterfall that stands to one side.

Asia Online's offices were designed by a master of feng shui, a Chinese philosophy based on the four elements of fire, earth, air and water. According to the designer, Randolph must sit facing the door and the waterfall. That's because the flow of water from the waterfall represents the flow of money and Randolph must be suitably positioned to receive it. Randolph obeys.

Flaky? Well, not according to such heavyweight venture capitalists as Pequot Capital, GE Capital and Softbank Technology Ventures, which have pumped $143 million into Asia Online since its inception in December 1998. It's Randolph's very willingness to enter into the spirit of the culture in which he's seeking to do business that gives them confidence.

Still, Asia Online is seeking public money at a time of continuing investor caution towards unprofitable technology companies. The Nasdaq has fallen 26% since 10 March. It is also competing for dollars with iAsiaWorks, a rival that just sold 9 million shares in an initial share offering on the same market at $13 each, the low end of its $13 to $15 range. Trading in the shares is set to begin on Friday. On paper the two companies look similar. For investors trying to decide whether to invest in one, both or neither, the deciding factor could lie in their differences.

kevin randolphAsia Online and iAsiaWorks are both internet access providers that hope to grow by expanding into higher margin businesses such as web-hosting, network integration, applications software services and consulting. It's a market that's poised to boom, analysts say. According to International Data Corporation, a research company, spending by Asian companies on information technology services will grow to about $27 billion by 2004, from about $12 billion in 1999.

"These companies are definitely in the right business at the right time," says Joseph Ho, an analyst at Dresdner Kleinwort Benson in Hong Kong.

Whether they are successful will depend on their ability to raise funds, their strategies for growth, and the makeup and skill of their management teams. Here the companies are different. iAsiaWorks believes Asia's internet market will follow the same pattern as in the US, where internet services are typically provided by specialists in different sectors. It's not uncommon for a US company to put together a technology package using software applications from one company, networking expertise from another, and internet access from a third.

iasiaworks logoiAsiaWorks, therefore, plans to specialize in the provision of web-hosting and co-location services for US companies seeking to expand into Asia and Asian companies seeking to expand into the US. The company is headquartered in Silicon Valley, California, and its management team is dominated by former US telecommunications executives, headed by JoAnn Patrick-Ezzell, 46, former head of AT&T Asia-Pacific. The company aims to generate 75% of its revenue from web-hosting by the end of 2002, from just 4.4% today.

Asia Online, by comparison, believes the Asian market will develop along its own, unique trajectory in which 'supermarket-style' providers will win the day. The company is based in Hong Kong and it's targeting small to medium-sized companies that are poised to move their businesses online but have yet to invest in their own infrastructure or technology. The company aims to provide internet access, web-hosting, systems integrations and applications software.

Its management team is dominated by an international group with backgrounds in marketing, technology and engineering. Randolph, 51, is an entrepreneur and engineer who has worked at numerous companies, including Bank of America and Interactive Network - a wireless interactive television game company he co-founded.

asiaonlineAlready Asia Online has made headway in diversifying its revenue. In the first six months ended 30 June 2000, the company generated 51% of its revenue from internet access, 44% from services such as systems integration and web development, and 5% from web-hosting. The company's goal is to generate 50% of its revenue from 'annuity' businesses, such as internet access and web-hosting, and 50% from professional services such as systems integrations projects and web development.

Both companies face formidable competition, both from regional telecommunications companies and local internet services providers. In Hong Kong alone, – a joint venture backed by Pacific Century CyberWorks, an internet company run by local tycoon Richard Li – is rolling out internet data centres in Beijing, Shanghai, Taiwan and Singapore. At the same time SunEvision, the publicly listed information technology arm of Sun Hung Kai Properties, is expanding through its iAdvantage subsidiary.

The importance of internet data centres

Internet data centres are central to the growth of any web-hosting company. They are especially equipped buildings that house the computer servers that run websites. A web-hosting company makes money by renting space on a server it owns, or renting space on a rack for a server owned by a customer. This is known as co-location. In each case, the responsibility for maintaining and monitoring the server falls to the data centre.

Asia Online operates data centres of different grades and sizes in 10 cities across Asia with a total capacity of 35,000 square feet. iAsiaWorks operates five. The company says it operates others through partners. Much of iAsiaWorks' success will depend on its ability to build or lease more data centres across the region. It plans to spend between $60 million and $90 million in the next nine months to establish new data centres.

Asia Online is further ahead. It's considering opening more data centres, but the company's strategy is on a 'just-in-time' basis, which means it only builds or leases once it has the customers to fill it. The company is filling a second data centre in Hong Kong. Most of the money it raises from its IPO will be used for acquisitions and marketing.

Both companies, needless to say, are unprofitable. In 1999, iAsiaWorks posted a loss from operations of  $12.2 million, on revenue of $5.6 million. The company has 210 employees. Asia Online posted a loss from operations of $13.1 million on revenue of $7.1 million. The company has 692 employees. Neither company believes that it will make a profit for several years.

exec jezzelliAsiaWorks, which was co-founded by Taiwanese venture capitalist William Tai, began operating in 1997 as an internet service provider under the name AUNET. In July 1999 it changed its name, revised its strategy and recruited Patrick-Ezzell, a 24-year veteran of AT&T. Patrick-Ezzell received a signing bonus of $100,000, a salary of $500,000, an annual bonus of at least $100,000 and a housing and car allowance. She also received nearly 2 million options, or 52% of the total available, at an exercise price of $0.45.

The company's new strategy started to take off in December 1999 when it acquired AT&T's web-hosting business, AT&T EasyLink in Hong Kong, and announced it had received $85 million in private funding. It has since acquired web-hosting companies in Australia and California.

Asia Online began life as a company called Asia Communications Global, founded by two institutions and a couple of Chinese businessmen. Randolph was originally hired by the company as a consultant. His brief was to recapitalize it and get as much money as possible for the original investors. Instead he decided to keep it going. Japan's Softbank sustained its investment and Randolph invested $100,000 in return for 87,719 shares of series-A preferred stock. Randolph's salary, including a $10,000 a month living allowance, totals $360,000.

Randolph also bought 1,062,500 in common stock for $0.02 a share. Asia Online has the right to repurchase a portion of the shares at $0.02 should Randolph leave the company before March 2002. Randolph's stock represents just under a sixth of the 7 million shares of common stock outstanding, or 3.4% of the company. Softbank, the biggest shareholder, owns nearly 29.3%

Goldman Sachs, Morgan Stanley and Salomon Smith Barney managed the iAsiaWorks' sale. Credit Suisse First Boston is managing Asia Online's sale.

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