Alien’s Failed IPO Fallout

By Andrew Price

The canceling of the company's plans to sell shares on the stock market isn't as bad for the RFID industry as some fear.

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Alien Technology, a provider of UHF radio frequency identification systems based on the Electronic Product Code standards, has for the past five years been a bellwether (and lightning rod) for the RFID industry. It was the first company to support the EPC vision of a low-cost tag with only a serial number, the first to claim it could eventually produce a five-cent tag and the first to receive an order for half a billion tags (that was from Gillette in 2002).

So when Alien filed papers with the U.S. Securities and Exchange Commission to sell shares in an initial public offering (IPO), industry watchers paid close attention. There was a great deal of speculation about what it would mean for other RFID companies if Alien held a successful IPO or was forced to pull it. A successful IPO could pave the way for other companies to go public. A failed IPO could make it tougher to go that route and even to raise venture capital, because investors might be concerned about their ability to cash out through an IPO.

End users may feel the real impact of the failed Alien IPO, in the form of higher prices.

Financial analysts contacted by rfid journal at the time of the IPO announcement said they doubted Alien would be able to pull it off. The company had negative gross margins, meaning it was losing money on the sale of its products, and the market was not excited enough about RFID to bet on a company that was losing money on every RFID interrogator it sold. They turned out to be right. Alien cut the price for shares and still could not get enough institutional support. In late July, the company announced it was putting the IPO on hold. A week later, it filed papers with the SEC saying it was withdrawing its plans to offer shares to the public.

Some RFID companies have privately expressed concerns that the Alien IPO debacle will hurt their prospects for raising money. “Venture capitalists are going to be gun-shy now when it comes to investing in RFID companies,” said the head of one startup that makes RFID middleware. “If they can’t cash out with a public offering, they’ll put their money elsewhere.”

Investment bankers have a different view. They say the market rejected the Alien IPO because the company’s financial performance was not good enough, and there was no plan to turn it around other than to wait for the demand for RFID systems to pick up. Most investors believe the market will pick up, but no one is exactly sure when. So investing in a company that’s losing money didn’t seem like a smart bet. Besides, they say, there are other avenues for investors (see box).

End users may feel the real impact of the failed Alien IPO, in the form of higher prices. Alien is one of a handful of companies that sell RFID tags and interrogators based on the EPC standards. The company clearly needs to raise more money to stay in business. If Alien, which has already raised more than $200 million in venture capital, can’t attract new investors, or raise money from existing investors, it will be forced to put itself up for sale.

Alien is not the only maker of EPC interrogators to run into problems. SAMSys Technologies, a maker of multifrequency, multiprotocol interrogators, went under earlier this year. Its assets were sold to Sirit, an RFID systems provider.

And Applied Wireless Identifications (AWID) was caught selling interrogators that had not been certified by the U.S. Federal Communications Commission (FCC). Its founder and CEO, Donny Lee, was ousted. The company recently laid off a number of key executives and reached a settlement agreement with the FCC, but the loss of sales on its second-generation EPC interrogators and the legal costs involved with settling with the FCC have weakened the company. It is now seeking funding to get back on its feet.

If Alien and AWID are unable to recover from their recent setbacks, it could mean that the RFID industry will lose three providers of EPC Gen 2 interrogators in less than a year. That could reduce the supply of interrogators in the short term and reduce competition in the near and medium term. End users, already struggling to justify RFID investments, would likely have to pay more for EPC Gen 2 interrogators. Anything that keeps interrogator prices high will slow the overall pace of adoption.