Game maker hopes buzz will carry IPO

The software developer creates games for handheld devices and a host of consoles including Sony's PlayStation 2. And it's working on titles for Nintendo's GameCube and Microsoft's Xbox--both of which have been stirring up a frenzy in the tech and gaming worlds lately.

The 5 million shares offered to the public rose as high as $9.35 in midday trading, above their initial price of $8.

The prospect of getting in on one of tech's few hot sectors may pull in some investors, said David Menlow, president of IPOfinancial.com.

"This is a difficult time for tech-related issues, but when you get into software entertainment, those ideas might have a little more interest for investors," he said. "But I'm not expecting any fireworks."

The company doesn't have a long history. It was founded in October 1999, and it managed to pull in revenues of $1.37 million by June 2000. It reported sales of $25.3 million for the fiscal year ended June 2001, and sales of $10.8 million for the first fiscal quarter of 2002.

It hasn't yet managed to turn a profit, losing $7.14 million in fiscal 2001, and $489,000 in the first fiscal quarter of 2002.

But although the past year or so has been terrible for the technology industry in general, video games have been a bright spot.

More brokerage firms are finding it worth their while to cover video game makers. Bear Stearns, Goldman Sachs and Merrill Lynch recently initiated coverage of Activision and THQ, with Merrill and Goldman picking up Electronic Arts as well. Activision and Electronic Arts were also added to UBS Warburg's latest Global Tech Focus list.

Investors have been paying attention. Electronic Arts, Activision and THQ have all been trading near their 52-week highs.

Joining the blitz
But what may have a bigger impact on Bam's initial public offering is the video game marketing blitz currently going on from Microsoft and Nintendo. Microsoft plans to launch its Xbox game console Thursday, and Nintendo's GameCube is due out Sunday.

"If you're going to do an IPO in the video game space, this is the time to do it," said Justin Baldauf, analyst at Merrill Lynch. It's a favorable position, he said: "You've got the two biggest launches in the business going on. There's a huge amount of marketing investment in a complementary industry."

Still, the good news for competitors may not be enough to float Bam's boat.

That may be why the company recently trimmed its offering, lowering its target price from $10 to $12 per share and increasing the number of shares from 3.5 million. Companies generally adjust their IPOs to make their stock more attractive.

There will be 12.6 million shares outstanding after the IPO, according to Bam's prospectus. That values the company between $100.8 million and $126 million.

Bam also changed its lead underwriter, nudging aside UBS Warburg in favor of Morgan Keegan and Jeffries.

While Bam has been losing money, the losses "are not as bad as others might think," Menlow said. "There is a very strong revenue curve for a company that has not been around all that long."

Of course, as we all learned from the dot-coms, you need more than good marketing to build a company. And Bam does have some obstacles.

Pause for thought
There are those losses, to begin with. And, although the company is undoubtedly counting on Xbox buzz to help it in that department, most of its games are designed for Nintendo's Game Boy platform. In fact, although Microsoft's Xbox logo is featured on the cover of the IPO prospectus, Bam's Web site asks gamers to "check back for upcoming titles." There's a similar exhortation for those interested in GameCube.

The bulk of Bam's sales last year, 66 percent, came from its three "Powerpuff Girls" titles, which are aimed at 10-year-old and younger girls. This is not exactly a demographic laden with excess cash--as opposed to other games, which are geared toward teenage males with more disposable income.

More troubling to potential investors, however, is that the success of previous games isn't a great indicator of future performance. The company's prospectus is fairly forthright on the situation, acknowledging that "even the most successful titles remain popular for only limited periods of time, often less than six months. The life cycle of a game generally consists of a relatively high level of sales during the first few months after introduction, followed by a decline in sales."

Essentially the company is saying that "substantially all" of its net sales for a given year will be based on titles released that year. This is a problem with most game makers; they have to come up with new hits each year.

Bam plans to use $23 million of the money raised in the IPO for product development. If that's not enough, it can also buy its way into a new product; $3.9 million of the proceeds are being earmarked for international operations and possible acquisitions. Under its terms, the company would make $32 million to $40 million from its IPO.

And as with anyone getting into the software market, it faces a slew of competitors. Electronic Arts, THQ and Activision's stocks have been doing so well in part because they dominate the industry.

"I think (the video game launch) is going to hold the deal together, in conjunction with a 31 percent cut in the price of the offering," Menlow said. "Those are two very positive signs."