First Dot-Com IPO to Hit Weak Market in Philippines

By:Sofia McFarland WSJ.com

Updated Oct. 8, 2000 10:44 p.m. ET

MANILA, Philippines -- Any technology company might think twice about an initial public offering these
days, let alone one in the Philippines, where the stock market is down 33% from the start of the year.

Still, Diversified Financial Network Inc. (www.dfnn.com ) is about to become the Philippines' first dot-com
IPO. The online financial-services firm plans to raise around $3 million from its Oct. 30 listing, part of
which will go toward an unusual business plan: building Internet kiosks in pawnshops.

"The mark of an entrepreneur is to look darkness in the eye and still say 'let's go,' " says Ramon Garcia,
DFNN's president and chief executive.

It certainly looks gloomy for an IPO of any stripe in the Philippines. In addition to the stock market's
woeful performance, the Philippine currency recently weakened to a record low. Meanwhile, the drawn-out
hostage crisis in the southern Mindanao province, where Muslim rebels are making a business of
kidnapping foreign tourists and journalists for ransom, is giving foreign investors the jitters. In fact, there
have been no IPOs in the country for the last year and a half.

But Mr. Garcia, a mercurial 32-year-old from a family that is well known in financial circles, shrugs off the
skepticism. "If not now, when?" he says.

His IPO strategy says something about the state of business in the Philippines. The offering comes at a time
when observers of the country struggle to determine whether its markets are under siege by ineptitude,
corruption and cronyism, or whether it's an information-technology center in the making, where a few
visionaries may play important roles in attracting new tech business.

Mr. Garcia plans for his IPO to give the company exposure to new clients, mainly financial institutions.
Launched in June 1999, DFNN allows financial institutions to offer stock-transaction services to their
customers, primarily through the DFNN Web site. Mr. Garcia refers to his company as an application
service provider, giving online traders and banks DFNN's proprietary software and then charging them on a
per-use basis.

DFNN, which racked up pretax losses of about 17.9 million pesos ($385,000) in the first five months of the
year, plans to issue 14.905 million shares at 10 pesos (around 22 U.S. cents) a share. The float will
represent 25.1% of the company after the listing.

Part of the proceeds will go toward building around 200 kiosks in L'Huillier pawnshops around the country.
While pawnshops may seem like an unlikely place to set up shop, DFNN reckons that they make good
distribution points, where customers can access financial institutions and apply for a loan, for example.

Connections Are Key

For Mr. Garcia, who is surrounded by some of the country's top finance players, connections may be key.
On the board of DFNN are four former Philippine Stock Exchange governors (including Mr. Garcia
himself), one former secretary of finance, and Jean Henri D. L'Huillier of the L'Huillier pawnshop family.

"To get to first base in the kind of business setting that we have, knowing the right people carries a lot of
value," says Ramon Borja, senior analyst at Abacus Securities Corp.

With so many board members closely tied to the Philippine Stock Exchange, it was impossible to consider
listing the company elsewhere, says Dickson Co, DFNN's chief financial officer. Another option might
have been to list in Singapore, where DFNN has a subsidiary to handle foreign partnerships it plans to set
up. But, Mr. Co says, "how would it look for [the board members'] integrity, if the IPO goes out in
Singapore?"

Nevertheless, DFNN recognizes the need to look outside the Philippines for business. Right now, the
company's clients are 17 brokerage houses in the Philippines and one in Thailand. DFNN has signed a
memorandum of understanding with India's Mittal Group and also is considering joint ventures in
Indonesia. In addition, it hopes to sign on banks as customers, but those talks so far are confined to banks in
the Philippines.

Net Penetration

So far, Internet penetration is fairly low here -- around 400,000 PCs for a nation of around 80 million -- and
Mr. Garcia admits that "understanding of the Internet is slightly underdeveloped in this country." But he
thinks his business will meet with success because the merchandise involved is money: "You don't need to
taste it, you don't need to feel it and you don't need to smell it," he says.

He's also hoping investors will see the Philippines as a pool of tech talent, and in March this year he
launched HatchAsia, a local incubator, which helps start-ups get off the ground. Mr. Garcia hopes to
eventually reap revenue from the ventures HatchAsia backs.

If successful, DFNN's stock listing could lift some of the gloom from the Philippine Stock Exchange,
whose main index is hovering around a two-year low. The exchange has been plagued by a share-
manipulation scandal involving a close friend of President Joseph Estrada, which caused many foreign-
fund managers to lower their exposure.

Look to the Future

DFNN's listing, though small, also will give an indication of the future for the country's tech start-ups. "We
have talked to the other tech companies in the country who have said, 'We hope you do well, because we
will go next.' " says Mr. Co.

Other tech companies have entered the stock market through the back door, by buying a traditional
company and turning it into a tech firm. One example is Philweb.com Inc., which in January acquired
control of a Philippine Stock Exchange-listed mining firm and transformed into an Internet-service
provider. Its price first rose dramatically, but, hurt by tech-stock weakness in the U.S., has since tumbled to
around 8 centavos from a year-to-date high of 54 centavos.

For its part, DFNN will be vulnerable if trading volume in the Philippines declines further. "Knowing the
market and the people is an advantage, but at the end of the day it's the size of the market that's going to be
critical," says Erwin Tan, head of research at Securities 2000, which nonetheless has a "speculative
subscribe" recommendation on DFNN and calls its business concept "fundamentally appealing."

Others say Mr. Garcia's courage may be admirable, but that investors might not share his optimism.
"There's a chance [DFNN] may outperform the market upon listing," says Mr. Borja of Abacus Securities,
"but I don't think institutional investors and fund managers will have the heart to take on the risk."