Net IPOs: They were top of the pops
First-day gainers changed Americans' lives, pocketbooks
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 5:00 PM ET Aug. 17, 2001
SAN FRANCISCO (CBS.MW) - They shot to the top of the class as the country's most popular Internet IPOs on their first day of trading.
FRONT PAGE NEWS
U.S. averages slammed by warnings
Ford shares fall after warning, restructuring
Internet IPO Yearbook: Thanks for the Memories
Appeals court won't delay Microsoft hearing
Market news and more! Sign up to receive FREE email newsletters
Get the latest news
24 hours a day from our 100-person news team.
Yet with one exception, most members of the Internet boom class of 1998-2000, while flickering, haven't burned out. Indeed, some of the online companies, while largely failing to deliver on the financial goals stated in their original prospectuses, have touched and changed the lives of many Americans.
"Yes, they've touched everyone in a way most (investors) might want to forget," said Scott Yara, co-founder of privately held software firm Metapa in Los Angeles. "But collectively, the companies helped to make the Internet part of our lives, for the better -- from changing our behavior in the way we access information to the way we communicate with family."
Late 1990s investors - willing to pay now-unfathomable prices for so-called new economy IPOs - voted with their wallets for the likes of Theglobe.com (TGLOQ: news, chart, profile), Foundry Networks (FDRY: news, chart, profile) and Cobalt Networks.
The three were among the top 10 Web-based start-ups that recorded historic first-day gains. Their subsequent days were hardly similar. While community Web site Theglobe.com appears to be on its last breath, Foundry Networks ranks among the 20 best performing Internet-related companies to go public in the past three years. Cobalt has since found a home within Sun Microsystems (SUNW: news, chart, profile).
The paths of other Internet-related companies in the top 10, such as VA Linux (LNUX: news, chart, profile), Sycamore Systems (SCMR: news, chart, profile), WebMethods (WEBM: news, chart, profile), MarketWatch.com (MKTW: news, chart, profile), the publisher of this report, Akamai Technologies (AKAM: news, chart, profile) and CacheFlow (CFLO: news, chart, profile), fall somewhere in between.
Still, all were early movers - if not copycats of the even earlier movers -- in their respective industries. All provided technology to speed up, support or service the Internet. With one exception, their stocks rose 400 percent or better on their first day of trading. Most of the stocks traded to their all-time highs within a month.
Thanks for the memories
"I remember that day very well," WebMethods founder and Chief Executive Phillip Merrick said about his company's first day on Nasdaq. The company's February 2000 offering was timed exquisitely. "We raised $170 million. Within days, Nasdaq fell below 5,000, and the rest is history."
Except for Foundry Networks, each stock now trades at a 50 percent discount or more to its offering price. That's about par for the course. Of the 363 Internet-related companies that went public between November 1998 and the end of February 2000, only 307 exist today and only 33 trade above their IPO price, according to Manhattan-based Dealogic.
In a few cases, like the stock of Theglobe.com, whose penny shares have been booted from Nasdaq, the paper value of these companies has all but evaporated.
To be sure, all technology companies, not just the fledgling Internet class, have suffered staggering stock market losses. Since the Nasdaq stock index peaked in March 2000, Silicon Valley's 100 largest publicly held technology companies, from Cisco Systems on down, have lost two-thirds of their combined market value. Some $2 trillion of shareholder wealth has been lost. (See related story.)
Back at the head of the Internet class, all but one of the top 10 Internet offerings rank in the top 10 first-day gainers of all time. Sycamore, ranked No. 10 on the list, rose 386 percent its first day. Sycamore's stock drops to No. 11 when compared with Datatec Systems (DATC: news, chart, profile), which rose 400 percent on its first day in 1992. That New Jersey company's shares now sell for less than a dollar each.
The stock-price performance of some of these Internet IPOs has become a legal matter. A great number of the Internet IPOs of the past three years have been machine-gunned with class-action lawsuits alleging the allocation of shares by their underwriters. Some of these lawsuits, including ones against MarketWatch.com, allege that underwriters failed to disclose they were selling shares of the newly public companies to customers who had agreed to buy more stock at higher prices.
"Clearly, venture capitalists and investment bankers overvalued these firms to the pain of many," said Ken Sawyer, managing director at Saints, a merchant venture capital firm in San Francisco. "But don't forget that the money wasn't zero sum. It went back into the U.S. and global economy and into employee and stockholder pockets, landlords, magazine and TV stations and to all of those little companies that print T-shirts, hats, pens, etc."
Present day brings hard times
Flash forward to the present: most of these promising companies endure challenges that vary widely from dispensing old business models to braving economic realities in their respective industries. Some are just trying to survive until they can raise more money or earn a buck.
Each is burdened with the daunting effort of ratcheting down expenses while slashing overzealous revenue expectations that once dressed up their company offerings.
Consider the outlook for VA Linux just one month after the technology support company went public. "We're looking to be profitable in late 2001, early 2002," said co-founder Larry Augustin in an interview with CBS.MarketWatch.com on Jan. 13, 2000. "We're investing heavily to reach the market."
Augustin's remarks rang a tune as familiar as the refrain now sung by the Wall Street chorus 18 months later. "It's too difficult to come up with a profitability date," a JP Morgan H&Q analyst wrote recently. The analyst suspended his forecasts for next year.
While some analysts are postponing their financial forecasts, others are dropping them altogether. Only five of the top 10 first-day performers have 15 or more Wall Street analysts covering them, according to Thomson Financial/First Call. The remainder have six investment banks or as little as two.
If there's one thing that resonates with most observers, both skeptics and believers, it's that the briefly inflated stock prices became symbols of alleged market manipulation, Internet momentum trading and above all, greed.
As stocks, the Internet burned holes in most Americans' pocketbooks. But few can ignore the creative ideas this Internet boom class inspired and brought to market -- and the technologies they delivered to an eager American public.
IPO Yearbook: 10 stocks, 10 stories
By Bambi Francisco, CBS.MarketWatch.com
Last Update: 5:00 PM ET Aug. 17, 2001
SAN FRANCISCO (CBS.MW) - Time was on their side, for a while anyway. Here's a time line of the 10 Internet stocks that enjoyed the best first-day gains, starting with the 1998 debut of Theglobecom. How it happened: See Part I.
Theglobe.com: Content, commerce, community
In November 1998, Theglobe.com - founded by then two 24-year-olds -- caused a stir that could cause the hair on a Thanksgiving turkey to stand up. At the time, its 600-percent first-day gain was the strongest performance for an IPO debut. For a fleeting moment, the two both ran a billion-dollar company. The IPO performance wouldn't lose its No. 1 ranking until 13 months later, when software firm VA Linux captured it.
Theglobe.com, which started as a chat room in 1995, packaged itself as online communities, incorporating the needed elements for a successful commercial Internet firm: content, commerce and community. Theglobe.com (TGLO: news, chart, profile) had content and it inspired community. What it didn't foresee was that content and community were easily had on the Internet. This summer, Theglobe.com said it was halving its 120-person staff and closing its flagship Web site.
When Theglobe.com's site opened for business six years ago, there were only 10 million World Wide Web users around the world. At the very least, the company, and the community Web sites that followed, showed individuals how to interact on the Internet.
MarketWatch.com: Fast news, data
By January 1999, dot-com buzz was growing, to the benefit of MarketWatch.com, the first online financial news site to go public. The IPO set a precedent for other content sites as MarketWatch.com stock (MKTW: news, chart, profile) rose 473 percent by the close. For a while, the stock had the second-best first-day opening, and currently it ranks seventh on the list.
MarketWatch.com, the San Francisco-based publisher of this report, enjoyed the heyday of the Internet as it benefited from millions of investors seeking breaking news information about their favorite stocks. MarketWatch.com has stuck with its advertising-driven model for delivering news online but also derives revenue from licensed content of news, charts and data. Yet much like other online advertising-supported sites, MarketWatch.com has suffered as advertising dollars disappeared. The company, with a languishing Nasdaq stock and a market capitalization that has dwindled to $40 million, has been hit hard by a stock market rout that decreased online investor activity.
For all the skepticism surrounding the survival of free financial news content, MarketWatch.com says it enjoys a large following of those who want up-to-the-minute interactive financial news and commentary. Average monthly users in the second quarter were 7.7 million, according to DoubleClick.
Foundry Networks: Likely to succeed
It wasn't until eight months later that another Internet-linked company hit the top of the charts on its first day. In September 1999, Foundry Networks, a maker of next-generation networking switches with an offering price of $1.4 billion, rang in the third largest first-day gain with a 500 percent first-day gain. By this time, the new wave of hot companies became firms that could speed up the Internet. Investors demanded the emerging crop of new technologies that alleviated Internet bottlenecks.
Foundry was one of them. To this day, Foundry (FDRY: news, chart, profile) still maintains the best return among the top-10 first-day performers. It's also one of a handful, or 10 percent, of Internet-related IPOs that have gone public in the past three years with a stock price trading above its IPO. That's in large part because Foundry is one of the few that has earned money. In April, Foundry's president and chief executive, Bobby Johnson, reminded investors that the company had posted its ninth consecutive profitable quarter.
Foundry isn't without its critics. Gina Sockolow of The Buckingham Research Group pointed out that both IBM (IBM: news, chart, profile) and Nortel Networks (NT: news, chart, profile) (CA: NT: news, chart, profile) have sued Foundry for patent infringements. She raises the issue of increasing pricing pressure in the corporate switch market or a demand freeze as Cisco Systems prepares the market for its new switch. Her advice to clients: invest in Juniper Networks (JNPR: news, chart, profile).
Even as competition heats up, Foundry still commands a market valuation of $1.8 billion and has managed to grow quarterly revenue from $24 million in its early days as a public company to more than $80-plus million today. Incyte Genomics relied on Foundry's Gigabit Ethernet network to provide DNA sequencing information for the Human Genome Project.
Sycamore Networks: Speed trap
Playing to the demand for Internet networks, one month later, in October 1999, another billion-dollar baby burst onto the scene. Sycamore Networks (SCMR: news, chart, profile), with a $2.9 billion valuation at its offering, enjoyed a near 400-percent pop. One month later, Sycamore's market cap hit $14.4 billion. Sycamore's stock appreciated from investors seeking to jump on the anything-optical bandwagon.
Sycamore also had initial traction with emerging telecom carriers open to becoming Sycamore's customers. Sycamore's fast growth hit a wall as its emerging-carrier customers were annihilated in the economic downturn. Sycamore's revenue reveals the crushing impact. After growing quarterly sales from $19 million in its fiscal first quarter 1999 to over $149 million just over one year later, quarterly sales dropped to $54 million. Companies were scaling back their plans to build nationwide networks. Annual sales projections, estimated by Ladenburg Thalmann, are expected to drop 29 percent in fiscal 2002 to $271 million. The company isn't expected to post a profit until fiscal year 2003.
Sycamore is one of the scores of optical networking firms that have helped transform the way information is delivered. It's also one of the first companies to talk about intelligent optical networking, and it helped advance the concept of mesh networking.
Akamai Technologies: Tangled
One week after Sycamore went public, in late October 1999, Akamai Technologies (AKAM: news, chart, profile) scored an even greater return on its first day. Shares jumped 458 percent by the close. The feeding frenzy was rabid and investors were eager not to be left behind. After a quiet beginning inside the research labs at MIT, Akamai would incorporate in 1998 and make its public appearance right smack in the middle of the bubble. It became a $30 billion company by the turn of the year.
Akamai's appeal was that it had an answer to problem: How do you get big, fat files, like video and graphics, through the Internet? Akamai would store the content at the edge of the network, effectively reducing the time it would take to deliver content. Moreover, the concept was to build out a network of servers overlaying the existing infrastructure. Thus was born to the idea of content delivery being Akamaized for performance - when Internet traffic and content to address it was exploding.
Now Akamai is worth $600 million. In April, the company reduced its 1,400-person staff. Akamai is receiving 10 percent of its revenue from Sockeye Networks, a company it has a 40 percent stake in. Sockeye's one customer, Focal Communications (FCOM: news, chart, profile), has already spent more than one third of the funding it received in June for licensing Akamai's technology, noted Banc of America Securities analyst Kevin Trosian. Trosian recently pushed out his projections for the company's profitability date. Akamai management is sticking to its goal of being cash flow positive in 2003.
"The big names in computing from IBM, Microsoft and Sun Microsystems are now talking about distributed computing. That's been the big idea that Akamai was founded on," said Akamai President Paul Sagan. Akamai's technology helped support a crush of traffic that went online to get up-to-the-minute information about the presidential elections on sites such as CNN.com, ABC.com and Washington Post.
CacheFlow: Flirting with success
CacheFlow, a maker of a caching appliance, was next in line to benefit from the demand for technology to speed up the Web. Investors had already taken a run at Akamai and Cobalt Networks, a server-appliance vendor. By late November 1999, they were onto the next Internet IPO.
In that month the Sunnyvale, Calif.-based firm, with a tiny $7 million in revenue for all of 1999, would end its first day of trading as a $4.1 billion company. Its value rocketed more than five times from an offering value of $780 million. During the time of its IPO, management indicated a profit by April 2001, according to Adam Holiber, analyst at Wedbush Morgan Securities.
By February 2001, CacheFlow (CFLO: news, chart, profile) warned it would fall short of its January quarter, partly due to exposure to struggling Internet service provider-customers. The tech spending freeze would take a bite from revenue just as it did with all Internet infrastructure providers. After generating $32.5 million in sales in the October 2000 quarter, the company suffered sales that would drop to roughly $20 million per quarter. Moreover, competitors such as Network Appliance were gaining market share in the caching market, according to analysts. Holiber's estimate for profitability is mid- to-late 2002.
CacheFlow was the only pure caching appliance company. The company is now valued at $180 million and has an estimated $65 million cash. "If it made sense for Sun to entered the server-appliance market with Cobalt, CacheFlow would round out the appliance offering under the Cobalt suite," said Holiber. CacheFlow could potentially be a product under the EMC Corp. brand as well, Holiber added.
FreeMarkets: Auctions, auctions
By December 1999, markets were ripe for investments. Investors need look no further than a company from Pittsburgh, Penn., called FreeMarkets.
The provider of auction-styled corporate sourcing was already benefiting from auction kingpin EBay's (EBAY: news, chart, profile) IPO one year earlier. FreeMarkets (FMKT: news, chart, profile) was seen as the EBay equivalent for businesses. It also was part of a trend to help companies use the Internet to save money.
FreeMarkets became a global sourcing market, helping firms source their buying needs by placing orders online and having suppliers compete for the orders. Skeptics argue that market drives down prices and inevitably scares potential suppliers from the bidding process. In February, FreeMarkets began offering a self-service product for companies that wanted to create their own sourcing marketplace. The company is expected to break even in 2002.
FreeMarkets, which has never warned or announced lay offs, has watched the value of goods sourced on its market grow from $2.7 billion at the end of 1999 to $9.9 billion at the end of 2000. In the second quarter of 2001, the company says it saved customers more than $1 billion, or roughly 18 percent of the average value of prices paid.
VA Linux: Spread the word
In December 1999, Fremont, Calif.-based VA Linux Systems (LNUX: news, chart, profile) enjoyed the "halo effect" for being a distributor of Linux software and one-stop provider of Linux technical support. Its banker, CS First Boston, valued the company at $1.2 billion even before it was public. It would take only one day's trading in the infectious bull pit of a market in December 1999 for the firm's value to swell nearly 700 percent. VA Linux's debut marked the biggest first-day gain in history.
Reconciling economic realities with stock valuations, investors pummeled VA Linux's stock from its high-water mark, split-adjusted price of $63.62 one month after it went public to about $2, or $110 million in market valuation, today. That's about the revenue analysts at one time expected the company to generate this year. The company, hurting from the economic slowdown and competition from larger companies, such as IBM, cut 35 percent of its 436-person staff in June.
Just as Theglobe.com brought awareness to Joe Public, VA Linux raised awareness for the Linux operating system.
WebMethods: A bridge to integration
In February 2000, the Internet craze shifted into high. One trend emerging across corporate America was and continues to be business transactions that increasingly move online. For instance, firms were seeking software that could automate the order process online so they could dispense with the hourly workers who keyed in orders into different databases. Fairfax, Va.-based WebMethods provided that software. At the right place, at the right time, WebMethods (WEBM: news, chart, profile) watched its market value soar to six times its size on its IPO day.
Dell Computer, one of the first to use the Web to sell computers, was one of WebMethods first customers.
Eventually, WebMethods moved into another direction - integration corporate software applications - to broaden its platform. It purchased Active Software to do so. All of the disparate pieces of software within and outside the corporation formed one big quilt, and integration software was the software thread to sew up the different patches.
After reaching profitability, WebMethods would become another victim of the downdraft. The company missed sales goals in the most recent quarter. In early July, WebMethods said it was cutting 15 percent of its staff, or 150 people. The company doesn't expect to break even until March 2002. The company has warned for each quarter in the first half of the year. The question is whether the company will do so for the September quarter, at which time it expects to report revenue between $50 million and $53 million. For the full fiscal year 2002, which ends March 2002, the company expects to generate between $210 million and $220 million, down from prior expectations in January of $325 million.
WebMethods' rivals, Vitria Technology (VITR: news, chart, profile), Tibco Software (TIBX: news, chart, profile), Seebeyond Technology (SBYN: news, chart, profile) and others, have taken similar lumps. Companies such as Microsoft (MSFT: news, chart, profile), meanwhile, are coming up with their own product integration software. And IBM looms large.
WebMethods nudged the technology innovation process along when companies were already inclined to begin automating their processes online. Yet with its stock at an all-time low this week, the company and its executives will need to work overtime to take business from a crowded field of competitors. |
