Pacific NetMarkets, which builds and operates online trading exchanges in Asia, plans to raise $60 million to $80 million in an initial public offering on the US Nasdaq in a bid to raise its profile, attract top managers and speed growth.
The Hong Kong-based company is poised to launch web sites that match buyers and sellers in Asia's food processing, pharmaceuticals and print industries. Its aim is to cut customers' costs by simplifying and accelerating their supply and distribution processes. By the end of the year Pacific NetMarkets expects to establish electronic marketplaces in at least three more industries. The company aims to list its shares in the fourth quarter.
As one of the first in Asia to establish itself as a conglomerate housing more than one industry-specific, or "vertical," online exchange, it has a rare opportunity to gain prominence in a growing market. According to US-based technology consultants Gartner Group, the transaction value of business channeled through electronic market makers in Asia, excluding Japan, will reach $581 billion by 2004. The total value of e-commerce in the region will rise to $995.8 billion from just $9.2 billion in 1999, the group forecasts.
"In Asia there are a huge number of potential industries that lend themselves to online trading," says John Livingston, a principal at management consultants McKinsey in Singapore. "The manufacturers are here so it's a logical conclusion that Asia will be a major player in the business-to-business marketplace."
While increasingly popular in the US, vertical exchanges that facilitate transactions, as opposed to broad-based "horizontal" sites such as Global Sources that enable buyers and sellers to find each other across a wide range of industries but don't always provide links deep into each sectors' supply chain, are rare in Asia. The first to go public was iSteelAsia, an online steel exchange, which recently listed its shares on Hong Kong's Growth Enterprise Market.
Pacific NetMarkets' closest US model is Nasdaq-listed Ventro û formerly called Chemdex û which earlier this year said it would expand from operating just a laboratory and medical supplies exchange to form at least four industry-specific exchanges. Ventro's shares fell nearly 80% in the three months to May 11 amid concern competition from an online exchange being created by five of the world's biggest major medical supplies manufacturers will erode its market share.
Pacific NetMarkets is unlikely to face immediate competition from such manufacturer-dominated exchanges as the Asian market in most industries is more fragmented, investors say. That means it is less easy for a group of buyers, such as the three big automakers in the US, to form, and dominate, their own exchange.
"In Asia you may have one major player in a given market but not more," says Brian Doyle, managing director at venture capital company Whitney & Co., which holds a 47% stake in Pacific NetMarkets. "As a result, this business model works in Asia where it wouldn't necessarily work in the US."
Still, Pacific NetMarkets faces substantial challenges. It needs, firstly, to ensure it has enough buyers and sellers to satisfy meet demand on either side. Which means the big manufacturers in each industry must agree to participate. To attract partners, Pacific NetMarkets is offering suppliers equity in their respective exchanges. No company will hold a majority stake, and collectively participants will not hold more than 49%. That's to make sure the exchange doesn't favor any single player.
As each exchange grows, Pacific NetMarkets plans to list its shares separately, probably on the Nasdaq. The first exchange to launch its own IPO will be PrintPacific.com, which takes and manages print orders from UK and US customers seeking to benefit from cheaper Asian suppliers. PrintPacific.com could list as early as next year. The pharmaceuticals exchange, Pacific Rx.com, and commodity food ingredients exchange, FoodPacific.com, will follow later.
"Each company will have the opportunity to go for their own public listing, which will enable management and our strategic partners to realize their investment," says Frank Au, Pacific NetMarkets co-founder and president.
Pacific NetMarkets will remain the largest shareholder in each exchange, he says. For the moment Pacific NetMarkets is not in desperate need of cash. In January, when it was formed, the company received $10 million from Whitney, which has agreed to invest an additional $15 million if needed. The company also may sell shares to a big investor prior to the IPO. In the meantime it expects to be generating revenue from PrintPacific.com as early as the second quarter.
"They have more capital coming at them right now than they know what to do with," says Whitney's Doyle. "They're not going public because they need the money."
What the company does need is top managers. In Asia, where interest in the internet only blossomed a year ago, the pool of experienced executives is small compared to the US, and competition for them fierce. Stock options, and a public offering through which they can be exercised, is a crucial bargaining tool in the recruiting process. Pacific NetMarkets plans to set aside 20% of its own stock, and 20% of each exchange, for its staff.
"It's not capital that's the constraining factor in our business, it's labor," says Ed Lupton, the company's chief executive. "If those who get to the market first do a good job it's going to be very difficult for others to catch up. Where are they going to get their people?"
Pacific NetMarkets is in a strong position to realize its ambitions because it is tapping the market early, has a reputable management, and owns a publishing business, analysts say. That's because it acquired the hospital and food trade publications of MediaCom, a private Hong Kong-based regional print and publishing company. MediaCom is majority owned by Lupton. The trade publications give the company a ready-made advertising base and revenue source from which to build its food and pharmaceuticals exchanges.
"I think these guys are pretty smart and I like the sectors they are going after," says Antonio Tambunan, head of internet research at Deutsche Bank in Hong Kong. "Frank Au has the reputation in town of being fast in everything he does, whether in business or on the basketball court. He's also very efficient. I have a lot of confidence in his ability to execute the business."