As Air Traffic Controller McCroskey, played by Lloyd Bridges in the movie Airplane!, might say, Travelzoo (NASDAQ:TZOO) picked the wrong week to start placing PIPEs, also known as private investments in public companies. Travelzoo sold 750,000 shares at $40 per share, raising $30 million for general purposes and product development. The stock closed Thursday at $52 per share after trading as high as $74 as recently as last Monday. Zoiks!
At the beginning of last week Travelzoo started to decline dramatically as rumors circulated that the company may do some sort of secondary offering. Tuesday the stock dropped 20% to $56.43 just on the hint of a deal. The actual news took another 10% out of the price on Thursday.
A PIPE is a form of stock offering that is usually done at a discount to the prevailing market price, but not usually at a 31% discount, which was the case with this deal. It is common for shares to sell off a little after this type of deal, but Travelzoo's trading should be memorable.
Investors in the deal won't be able to sell right away, as the shares are not yet registered. That does not mean that participants could not potentially sell short in the open market, thus realizing a profit between the sale price and the $40 purchase price. No wonder the SEC is investigating whether there is stock price manipulation around these types of deals.
Secondary offerings don't have to be evil things -- quite the opposite, really. The company now has a $35 million war chest to make improvements and work on new products. Some will squawk about dilution, but I disagree. Travelzoo was already very expensive at 133 times 2005 earnings, 37 times sales, and 120 times book value before the deal. It was expensive before the deal, and it is expensive after the deal. Not that much has changed here. This is how young companies access capital, as opposed to a mature company such as Ford Motor (NYSE:F), which would typically access capital in the debt market. If Ford were to increase its float through a secondary offering by 37%, like Travelzoo has, every valuation for measuring the company would be hideously out of whack.
While I can't help but feel that the existing shareholders, most of whom are individuals, got hosed, the deal is done, and the stock has lost a third of its value. I'm sure the stock will be a good proxy for Internet travel, but I think management will have a tough time getting shareholders to trust them anytime soon.
Fool contributor Roger Nusbaum is an investment manager and wildland firefighter in Prescott, Ariz. At press time neither he nor his clients owned any of the stocks mentioned.
