Engenio Gets Cold Feet

Worry about not raising sufficient funds to make an IPO worthwhile has caused Engenio Information Technologies Inc. to postpone the public offering it originally planned for today.

In a statement Thursday night, the company declared its intention to evaluate market conditions for "a more appropriate time" to go public (see Engenio Postpones IPO and Engenio Might Wait on IPO).

Industry sources say the appropriate time will likely be no sooner than the fourth quarter for any storage company considering an IPO.

Engenio is the storage division of LSI Logic Corp. (NYSE: LSI), which announced the intention to spin if off last November (see LSI Logic Spins Off Storage Systems and LSI Spells Engenio).

Sources say the company and its underwriters -- Morgan Stanley, Goldman Sachs & Co., Lehman Brothers and Wachovia Securities Inc. -- called off the IPO because they found preliminary bids well below the target range of $8 to $10 per share. Engenio hoped to raise $102.4 million through the offering.Engenio planned to offer 12.5 million shares, with LSI Logic holding another 50 million. If Engenio achieved its target price, its price would have been about 1.1 to 1.4 times sales. Thats about where LSI Logic trades, so there would be little premium to stockholders.

In SEC documents filed in February, LSI said it hoped to complete the IPO for its storage division in the first half of the year (see LSI's Storage Sub Plans IPO and LSI Storage Becomes Engenio). That date was pushed back soon after competitor Xyratex Ltd. (Nasdaq: XRTX) went public June 24 and opened below expectations, at $14 (see Xyratex Swims in Public Pool).

In an SEC statement filed Tuesday, Engenio listed revenues of $113.3 million last quarter and net income of $4.6 million, or $0.09 earnings per share. The revenue increased 13 percent from the same quarter last year, although it dropped $2.5 million from the previous quarter. Engenio primarily sells SAN arrays, listing IBM Corp. (NYSE: IBM), Storage Technology Corp. (StorageTek) (NYSE: STK), and Silicon Graphics Inc. (SGI) (NYSE: SGI) as customers.

Analysts say Engenio’s decision to push back its IPO says more about market conditions than about the company's financial condition. “It’s a commentary on what investors think of the market and the next couple of quarters,” says Steve Berg of Punk Ziegel & Co. “I don’t take it as a commentary on the company and its products.”

There’s no denying market conditions are less than optimal. Storage stocks have dropped significantly over the past month, and Xyratex shares are trading at about 30 percent below the $14 they fetched the first day of trading.“Engenio probably would have been valued 30 percent less now, compared to the same time last month,” says analyst Kaushik Roy of Susquehanna Financial Group. “It didn’t make sense to price in now. But the question becomes, ‘When do you do it?’ I don’t see much improvement until after the elections.”

Engenio’s decision to push back its IPO could affect other storage companies considering going public. Sources say executives of SAN systems vendor XIOtech Corp. were watching to see what type of valuation Engenio would get and considered following if the valuation was high enough.

Storage software company CommVault Systems Inc. is also considering an IPO, but present market conditions will probably force it to wait until the fourth quarter at the earliest (see CommVault 'Well Positioned' for IPO).

— Dave Raffo, Senior Editor, Byte and Switch