Apr 15, 2016 ยท 5 minutes

So far in 2016, 10 companies have listed on US stock exchanges, according to Renaissance Capital.

Most of them are in the biotech/health-care sector, although one financial firm, Bats Global Markets, priced its offering Thursday night.

Among the companies that have filed for offerings but that have not priced them is SecureWorks, a company that offers security services for IT networks, shielding them from breaches and other online threats. SecureWorks has 2,400 clients and derives 39 percent of its revenue from the financial services industry, including one client – Bank of America – that made up 9 percent of revenue last fiscal year.

During IPO droughts, investment banks will try to kindle interest for offerings by bringing forth the strongest candidates in the pipeline. That SecureWorks is being offered as a test case for other tech IPOs speaks to its history. The company was founded in 1999, then bought by Dell in 2011 for $612 million and later renamed Dell SecurityWorks. Network security is also a promising area, and SecureWorks saw revenue rise by 30 percent to $340 million last year.

SecureWorks has one quality that is not always in favor when IPO investors turn choosy: a recent history of losses. Net loss rose by 88 percent last year to $72 million. Much of that loss came from a rise in operating expenses, which were equal to 77 percent of SecureWorks' revenue in 2016, compared with 68 percent a year earlier.

Another potential positive for the company is its association with Dell. SecureWorks' revenue grew significantly under Dell's ownership as the company had exposure to corporate clients Dell had cultivated as it pushed into IT services. And SecureWorks also benefited from having Dell as a parent, giving it more time to push toward profitability, a luxury investors aren't always willing to extend to an independent company.

For all of SecureWorks' promise, though, there is another area of investor concern beyond financial losses – the manner in which Dell is spinning off the company. The lion's share of SecureWorks after the IPO will be held by Denali Holdings, which is jointly owned by Michael Dell, Silver Lake and Dell family trusts. Denali will also hold 98 percent of voting rights after the IPO. 

Should investors decide to agitate for change at SecureWorks, they will find their voices muted. These kinds of provisions are growing common in an era of shareholder activism, but other risk factors facing SecureWorks have some less common provisions as well. For example, the shares Dell will hold in SecureWorks after its IPO “are pledged to secure Dell's indebtedness,” according to the S-1. If Dell goes down with its EMC buyout, SecureWorks goes down too.

This is an unlikely outcome, although not an impossible one. The Dell-EMC merger is itself a masterpiece of creative financing. And by masterpiece, I don't mean something by Michelangelo, but the way the word is tossed about loosely when some people talk about Thomas Kincaid. It all seemed plausible last fall when Dell and EMC announced their marriage, but the credit markets have tightened since then.

What's more, Dell may be having trouble raising the tens of billions it needs to pull off the $67 billion EMC deal. One idea was to raise billions by issuing a tracking stock in EMC's sizable stake in VMware, but VMware's 33 percent decline since then has complicated that plan. Dell also sought to raise as much as $5 billion selling off Perot Systems, but ended up selling it for $3.1 billion, $800 million less than Dell initially paid. In short the Dell-EMC merger is far from being in jeopardy but it's not going as smoothly as planned.

Contrary to some early reports about the SecureWorks IPO, the proceeds from the offering won't go to Dell or Denali, as the company explicitly made clear this week in an updated filing. Instead, the proceeds will go to SecureWorks to help it finance potential acquisitions and general corporate operations.

SecureWorks' operations used $9.8 billion in cash last year, but it more than offset that by raising $46 million last year through cash transfers from Dell and issuing $22.5 million in convertible debt. When SecureWorks does go public, holders of those convertible notes will receive a guaranteed payout of $28.1 million worth of shares, regardless of how shares are priced in an IPO. If demand is low, SecureWorks will issue more shares to pay holders of the debt.

This is becoming a common theme in tech IPOs, the issuing of extra shares to make good on pre-IPO promises. Square and others have gone public with ratchet provisions that offered similar guarantees to equity investors in private rounds. There's nothing wrong with this practice per se, it just won't whet any appetites in a lackluster market for IPOs. And it's a bit of fallout from pre-IPO valuations that grew inflated above what the public markets were willing to pay. SecureWorks, for example, was said to be worth $2 billion last summer. The initial pricing range of the IPO this week recalibrated that value to between $1.3 billion and $1.5 billion.

Details inside the prospectus suggests Dell is distancing itself from SecureWorks. The company is no longer called Dell SecureWorks, and in fact it can only use the Dell trademark “solely in the form of 'SecureWorks – a Dell company.'” This even though “our association with Dell has helped us to build relationships with many of our clients because of Dell’s globally recognized brand.” SecureWorks CEO Michael Cote will also no longer hold a title at Dell, despite Denali's controlling interest in his company.

That may be because EMC has its own cybersecurity offerings, Pivotal (which may also attempt an IPO this year) and RSA, along with VMware's NSX. It may be that SecureWorks is going public because Dell sees it as able to thrive on its own. Or Dell is just spinning off a business that overlaps too much with EMC's security businesses. Either way, SecureWorks will have its work cut out for it in a post-Dell, post-IPO era. It's a promising enough IPO candidate, but hardly the slam dunk underwriters may have been looking for to get the IPO market back in gear.