I'll share my initial thoughts - and I'm not at all surprised by the market's response (down 4%) this morning.
Clearly the market still doesn't "trust" SFE and its management. I call that good news because once that changes, the cumulative effect of the Avid (once it's completed), CLRT, (remember CLRT was a legacy company but it did change direction under the Boni regime - if I recall correctly) and I'm hoping, the ABH deals will cause that to change. Once/if it changes, the market will start to value SFE much more aggressively.
I will say that I'm disappointed in the Mezzanine financing arrangement. Yes, it enables SFE to do bigger deals in the long-run that are later in the life cycle of the evolution of growth companies and thus lower risk and lower return. I'm sure this is attractive to SFE management. Clearly, and to this point, SFE's exits are so few and irregular that they are viewed as extraordinary events. It would seem that management thinks that ABH and the other recent deals won't change that perception.
My view is that SFE is straying from its core mission and I find that disappointing despite the potential synergies. As an investor, I can diversify by investing in any of thousands of other publicly traded stocks. I don't need Mr. Boni to do that for me. SFE has relatively small deal teams. Can they handle the additional volume? Will there be conflicts between the entities? If SFE has such a great volume of investment opportunities then why have we seen so few investments over the past 18 months. SFE should have been making lots of investments in the 2008 timeframe.
My belief is that SFE's competitive advantage is investing in and helping management of early stage companies develop. SFE's success and the mezzanine agreement should enable it to extend the length of the pipeline where it can help these partner companies. For example, if the mezzanine fund is used to fund an AdvantEdge Healthcare Solutions acquisition spree then that is great. Obvious synergies with minimal conflict. My concern is that SFE management won't be disciplined enough to keep its focus on the existing business and treat the mezzanine fund as a supplement. It's easy to envision a compensation structure where management benefits disproportionately from the Mezzanine fund vs. the core business and the tail starts wagging the dog.
I'm going on too much. However, the bottom line is that the market doesn't trust SFE management. Personally, I'd have preferred to see SFE keep it's focus on its crop of businesses and growing them. I'd also like to see the company be in a position to bring in more new partners when market conditions are favorable. Now, the feeding frenzy is back on amongst VC firms and SFE should probably focus more on selling than buying, which to its credit seems to be the case of late.
Other notes. I was pleased that the PixelOptics investment was made at a $100m valuation. Note that SFE's stock price the day that deal was announced went down about the same amount as it did today with the announcement of the $30m investment in the mezzanine fund. It would seem that the market thinks SFE is making poor investments.
I also liked the news that AHS made another acquisition at the end of Q42010 and the progress reported at Portico and MediaMath.
Over the coming days I'll crunch my numbers and see how my valuation of SFE changes. One thing. I sure wish SFE would release revenue data for the partner companies. It's sort of like professional sports teams not marketing their players.