Page's brother uses tactic with tainted history /Mercury News
~ Carl Page became an Internet success story before his younger brother, billionaire Google co-founder Larry Page
~ he and his colleagues have just raised money for their newest company with a financing tactic tainted by a long history of scams
Handheld Entertainment
~ made a portable device for playing digital audio and video
~ co-founded -- and funded -- three years ago by Carl Page
~ company raised $7.6 million by going public through a reverse merger
~ instead of slogging through the lengthy process of a conventional initial public stock offering, or IPO,
~ Handheld purchased a dormant or ``shell'' public company and merged into it
~ such reverse mergers are quick and inexpensive,
~ but lack careful scrutiny from investment banks as well as some of the regulatory oversight of a conventional IPO
~ until a crackdown by the Securities and Exchange Commission two years ago,
~ oversight was so lax that reverse mergers were a favorite tool of ``pump and dump'' con artists
~ con artists would take control of a private company of dubious value on the cheap,
~ take it public through a reverse merger into a shell that they acquire, and then sell stock to gullible investors
~ many of these companies collapsed once the con artists sold all the stock
~ however, the SEC clean-up is now luring some established and legitimate businesses -- such as Handheld --
~ to consider reverse mergers, even though the bad smell is far from dissipated
~ an academic study in the December issue of the Journal of Corporate Finance showed just how risky reverse mergers,
~ also known as reverse takeovers, can be for investors:
~ authors reviewed 121 reverse mergers from 1987 to 2001 and found 54 percent failed within two years
~ over half of reverse takeovers end in delisting or bankruptcy, study concluded
~ such deals tend to be speculative in nature and fail to generate long-term wealth gains
~ Jeff Oscodar, Handheld's chief executive officer, conceded during an interview last week that,
~ historically, there has been a taint surrounding reverse mergers but taint curve is coming down
~ that may be true, although it seems unlikely Handheld could have raised money through a regular IPO
~ company is a mouse going up against a lion
~ its hugely ambitious plan is to grab a chunk of the downloadable digital music and video market from Apple,
~ which has a virtual lock on the world's ear canals with its phenomenally popular iPods and the iTunes Music Store
~ Handheld introduced its first product, a portable player called the Zvue, in late 2003
~ Wal-Mart agreed to carry Zvue last year. But sales were under 20,000 units for the first nine months of 2005,
~ the most recent period reported by Handheld company lost $2.3 million on sales of just $937,100 in those nine months
~ hardly a shining performance after more than two years in one of the fastest-growing areas of consumer electronics
~ Apple, by comparison, is now selling about 150,000 iPods a day
~ Handheld is hoping for a turnaround by introducing a new generation of products,
~ due later this year, with bigger color screens at prices below equivalent iPods
~ reverse merger gave Handheld the opportunity to finance its turnaround plan,
~ in this case by selling shares to private investment funds that specialize in small public companies
~ These investors got their shares just before the start of public trading
~ They're excited to get into this deal that had a kind of Silicon Valley, venture capital spin to it,'' Oscodar said
~ Certainly, Carl Page knows about start-ups with spin
~ In 1997, he co-founded eGroups in San Francisco,
~ at about the same time his brother was launching Google in his Stanford University dorm room with partner Sergey Brin
~ EGroups was sold to Yahoo in 2000 for $420 million worth of Yahoo stock
~ According to several accounts of Google's early days, Larry and Carl inspired each other and often turned to each other for advice
~ They even shared a venture capitalist -- Michael Moritz of Sequoia Capital in Menlo Park
~ provided early funding and took board seats at both eGroups and Google