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IPO Focus: Broadband
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August 15, 2000: 5:56 a.m. ET
WJ Communications promises speedy delivery; investors hope for quick return
By Staff Writer Luisa Beltran
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NEW YORK (CNNfn) - Time and time again, the promise of sending voice and video quickly over the Internet has proven an irresistible temptation for IPO investors hoping to make an equally rapid profit off a high-flying new stock.
This week's temptation could come in the form of WJ Communications, a Palo Alto, Calif.-based maker of broadband communications products and the latest example of an Internet component company that analysts believe has the IPO "magic" to soar on its first day of trading.
The little-known but thriving company develops radio frequency products that let companies send voice, video and data traffic along fiber optic, broadband cable and wireless networks. Each of those sectors has proven hot individually, much less combined.
 Couple that with a customer list that includes such heavyweights as Lucent Technologies (LU: Research, Estimates) and Nortel Networks (NT: Research, Estimates), and analysts believe the company merits strong consideration by investors.
"Their technology is pretty all encompassing," said Corey Ostman, co-chief executive of Alert-IPO.com. "Not only does it have broadband but optical networking."
"They're in a hot area and they're selling to top customers," added Francis Gaskins, editor of Gaskins IPO Desktop (GaskinsCo.com). "Anyone is hot that sells to broadband markets."
Public again
WJ Communications has a tumultuous past, having tempted investors with its shares once before, before pulling back following a 1999 merger and divestiture of several units. Those actions sparked a number of still outstanding investor lawsuits.
The company is now involved in four class action lawsuits alleging breaches of fiduciary duty related to its merger. WJ has entered into a "non-binding memo of understanding" with plaintiff's counsel and is currently trying to settle such claims, the company said in an Securities & Exchange Commission filing. Company officials declined to comment for this article.
The lawsuits are all public knowledge, said John Fitzgibbon, editor of WorldFinanceNet.com. "It's a non-factor as far as bringing this company public," he said.
In this case, analysts believe the company's hot sector may be a little too tempting for investors to overlook.
Founded in the 1950s as the Watkins-Johnson Co., the company got its start developing microwave devices for defense electronics and space communications systems. WJ Communications gradually turned its focus to the commercial sector, building its niche in radio frequency technology, which is common to fiber optic, broadband cable and wireless communications networks.
In October 1999, the once public company went private when it merged into an affiliate of Fox Paine & Co. and then sold its semiconductor equipment business and telecom group, which counted for nearly half of its sales. In April, the company changed its name to WJ Communications and sold off several businesses. The slimmed-down company is now looking to tap the equities markets again.
Besides the lawsuits, the only other issue playing on this deal is the annual Labor Day hiatus. As the IPO market shuts down ahead of the late-summer holiday, interest in the company's first day of trading could be low, Fitzgibbon said.
The Fox Paine association should prove a plus, said Angelish Kumar, IPO analyst with 123Jump.com. The high profile private equity company likes to take stakes in companies with good potential, she said. After the IPO, Fox Paine Capital will hold a near 70 percent in WJ Communications.
Cisco Systems is also interested in purchasing a stake in WJ, the company said in a filing with the Securities & Exchange Commission.
Network components
Similar deals have proved their strength in the aftermarket. On May 25, Stanford Microdevices Inc. went public, selling 4 million shares at $12 each via underwriters led by Deutsche Bank Alex. Brown. Stanford closed its first day at 15-3/8 but its shares have since tripled. On Friday, the company gained 2-1/4 to close at 45.
Sunnyvale, Calif.-based Stanford Microdevices (SMDI: Research, Estimates) provides radio frequency components used in wireless communications equipment to improve voice and data reception.
On August 4, a similar company, Microtune Inc., soared 90 percent in its first day. Plano, Texas-based Microtune (TUNE: Research, Estimates) makes single-chip radio tuners and transceivers used in such things as telephone systems and cable modems. On Friday, Microtune gained 1-1/4 to close at 31-3/8.
Greensboro, N.C.-based RF Micro Devices Inc. (RFMD: Research, Estimates) makes radio frequency integrated circuits for wireless communications applications, including cellular and PCS. The stock rose from its 1997 IPO to an all-time high of 184-1/2 earlier this year but closed Monday at 68-7/8.
The deal
WJ Communications plans to offer 5.4 million shares at $14 to $16 each via underwriters led by Chase H & Q. The company plans to trade under the Nasdaq symbol "WJCI."
WJ Communications relies on a very small number of customers to generate revenues. Nortel and Lucent together generated about 69 percent of WJ's sales for the six months ended June 30. Other clients include Cisco Systems (CSCO: Research, Estimates), Nokia Corp. (NOK: Research, Estimates) and Samsung.
WJ competes against other original equipment manufacturers such as Cisco, Ericsson, Lucent Technologies, Motorola Inc. (MOT: Research, Estimates) and Nortel as well as ADC Telecommunications (ADCT: Research, Estimates), Powerwave Technologies (PWAV: Research, Estimates) and RF Micro Devices.
WJ Communications produced gross margin of 37 percent in its last quarter. Component companies with margins of 40 percent or less tend to perform poorly in the aftermarket, Gaskins said. However, the current component shortage should alleviate such problems, he said.
WJ had $33.9 million in operating losses and a $17.1 million gross profit for for the six months ended June 30. Sales of $44.7 million for the period compare with full-year sales of $47.2 million in 1999.
"This company has even made money in the last few years," said Matt Zito, co-founder of IPOguys.com, a Web site for retail investors. 
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WJ Communications
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