Wednesday, March 19, 2008

CardioNet and The Bear (Market)

Following the closing of its $110 million round a year ago, CardioNet Inc. execs were confident their company would soon go public. At one point, one backer of the company--when IN VIVO Blog asked if CardioNet would go public sometime soon--answered our query with a rhetorical question: Does a bear (do its business) in the woods?

We took that as a yes, but not any old yes. It was a confident, perhaps cocky, yes that suggested CardioNet might be immune to the ills plaguing other device companies.

Well, as Larry Bird used to say. It ain't being cocky if you can back it up. Sure enough, CardioNet did go public, going out today at $18 per share. For any other company, an $18 opening share might be a triumph. For CardioNet, it was the absolute lowest price the company could go while abiding by the terms of the unusually structured $110 million financing.

As we've explained a few times, go to our article here or earlier posting here, buyers in that private round acquired shares that would convert into common shares at the time of the IPO, giving them a discount on the offering. Among the investors taking part were venture investors Sanderling Ventures and Foundation Medical Partners as well as H&Q Funds, but they were relatively small investors. Hedge fund reportedly were the biggest buyers.

According to the company's S-1, CardioNet sold 114,839 shares of "mandatorily redeemable convertible preferred stock" at a purchase price of $1,000 per share, giving the company $114.8 million.

The conversion of those "convertible preferred stock" depended on the offering price of the shares. Had CardioNet gone out at say $23 per share, the mid-point of the previous range, those convertible preferred stock would have converted into 5.9 million of common stock.

According to the S-1 filed when CardioNet adjusted the price to $18-$20, the conversion would have amounted to 7.2 million shares if the company priced at $19. So ultimately, investors in the round obtained more than 7 million shares.

But the deal included some fine print that essentially put a floor on the pricing of the IPO.

From the S-1:

Each share of the mandatorily redeemable convertible preferred stock will convert into shares of common stock in connection with the offering at a conversion ratio of $1,000 divided by 87.5% of the initial public offering price, subject to a maximum denominator of $23.40 per share and a minimum denominator of $15.70 per share.
By our math, 87.5% of $18--CardioNet's opening price--is $15.75. So CardioNet's $18 offering price rests on the price floor determined in the March 2007 financing. It looks to us that the company couldn't go any lower with an offering price and still abide by the terms.

Now the only remaining question is will the price hold? Early reports show it's holding--barely.

Further reading shows it wouldn't have been prudent to wait much longer. According to the S-1, after the end of 2007, the rate of common-shares per convertible preferred shares rose 5% each year, with the increase compounded quarterly. So the longer CardioNet waited, the more shares went to the investors in that final private round.

But one thing worth noting. According to the S-1 documents, Boston Scientific--which acquired a stake in the company through its purchase of Guidant--was scheduled to sell 400,000 shares at the offering. But, according Renaissance Capital's IPO Home site, selling shareholders sold 1.5 million shares through the offering, not 400,000. We're not sure who the additional sellers were. (UPDATE: Guidant/Boston Sci sold the additional shares as well.) (Doff of the cap to VentureBeat LifeScience for pointing that out for us.)

CardioNet is trading under the symbol, BEAT.
image by flickr user Vljay Pandey used under a creative commons license.


Anonymous said...

At the last minute Guidant increased the number of their shares being sold from 400,000 to 1.5 million. This is according to SEC filings and a CardioNet press release published on their website. Guidant has 787,873 shares owned after the offering. Guidant has granted the underwriters the option to purchase 675,000 shares to cover over-allotments.

Tom Salemi said...

Thanks much.