On Wednesday afternoon, Modu founder and CEO Dov Moran was still confident in his ability to float the developer of the light mobile telephone on the Tel Aviv Stock Exchange (TASE) and raise the funds needed to keep the company going. Moran, who at that time was still trying to convince institutional investors to take part in the offer, expected to issue up to $40 million in debt and equity. For the purposes of the offering, a mechanism was set up under which the funds raised by debt would remain in a trustee account and be released for the use of the company if it met specific milestones over the next few years.
Several hours later, it was all over. Through Thursday morning, there were a total of only $5-6 million in orders, out of the $20 million Moran had hoped to raise just in the equity offering (without debt) for immediate use. Sources inform "Globes" that the reason was that institutional investors, including Migdal Insurance and Financial Holdings Ltd. (TASE: MGDL), Israel Phoenix Assurance Ltd. (TASE: PHOE1;PHOE5), and Excellence Investments Ltd. (TASE: EXCE), decided to forego participating in the offering.
After Moran and the underwriters realized that institutional investors were staying out, and they were left without an anchor investor, it was clear that the offering had failed and they were left with no choice but to announce its cancellation. The impact is first of all a blow to the company and its workers, as apparently 100 out of 130 employees will be let go.
Underwriters expected Migdal, for example, to invest about $6 million in the offering, and they even received unofficial indications that it would. In the end, Migdal, like other large institutional investors, held back from investing in Modu. (One investor in Modu is actually Migdal's controlling shareholder Generali Group).
Underwriters also expected Phoenix and Excellence's mutual funds to each invest $3 million, but "at the moment of truth the investors simply did not show up, the bird remained in the tree," said a source involved in the offering. "Everyone sat on the fence, and when Migdal decided not to invest, an avalanche began."
Migdal said in response, "Migdal met Modu's entrepreneur just like it meets many organizations in the market, but nothing advanced beyond that. The fact that Generali is involved in a specific company does not prevent Migdal from investing in the same company, to the extent that the investment is economically justified." Migdal added that the decision not to invest in Modu was based on Migdal's estimate of the company's technology.
Moran: I failed
Modu's offering was controversial from the outset. The figures in the prospectus were tough to digest, even for a start-up reaching the local stock market. The prospectus showed that the company was suffering heavy losses, and a "going concern" warning hung over it. In an updated prospectus published a week ago, Modu said it was interested in raising up to $40 million, at a valuation of $90 million before money.
Moran, it turned out, knew that he needed at least $20 million in order to get through the coming year, and aimed the amount of the offering toward that. At the same time, it was clear that with less than $12 million, the company would have to forego the offering, which is what actually happened.
"I failed," said Moran in a conference call with reporters on Thursday evening, just before he ran to inform employees the tough news. Yet at the same time, he said, "This is not the end of Modu. We will turn to other sources of capital and try to raise funds, and the company will continue to sell its products."
Apparently in the near term 20-30 employees will remain at the company, and they will provide sales and marketing support, in a bid to continue operations as much as possible.
Modu set off at the end of 2007 under Moran's leadership, after he had sold memory products company msystems to SanDisk Corporation (Nasdaq:SNDK) for $1.6 billion. Modu ran into difficulty right at the start, with the economic crisis and strong competition. What at first appeared at first glance to be a sexy option led by an experienced entrepreneur, quickly turned out to be an irrelevant product.
Modu needed large sums of money from the beginning in order to enter the competitive telephone market, which was certainly one of the reasons for the aggressive public relations campaigns that the company ran. All in all, the company raised $124 million, and Moran, in a fairly unusual move for entrepreneurs, took a significant part in the company's funding and invested $13.5 million of his own.
Other Modu investors include Idan Ofer's Lynav Shipping ($25 million), Rhodium (about $15 million), Gemini Israel Funds and Genesis Partners (about $10 million each), Japanese telecommunications company Softbank Mobile (about $10 million), and Qualcomm (about $7.5 million). Moran also raised about $5 million from memory company Kingston and from Greylock Partners, and insurance company Generali invested about $11 million.
Published by Globes [online], Israel business news - www.globes-online.com - on November 22, 2010
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