Tech IPOs take a breather
By Bloomberg News
Special to CNET News.com
August 27, 1999, 3:40 p.m. PT
NEW YORK--No initial public offerings are scheduled for next week, the first week without IPOs since October 1998, as a summer slowdown and a mixed reception for new sales reduce investor interest.
Many companies withdrew offerings planned for this month, while others decreased the size of their sale as an inducement to investors. Initial day gains were about one-third those of companies that went public in January, although some which did brave the markets recently performed well.
Software provider Red Hat rose 272 on its first day trading on August 11, and yesterday's two initial sales, Bamboo.com and Imagex.com, rose 151 and 99 percent on their first day, respectively.
"The market's picking up steam, it'll be a full fall," said John Walecka, a partner with Brentwood Venture Capital, a Silicon Valley venture capital firm. "The only thing that will slow it down is the buy side's ability to absorb all these new names."
Bloomberg's U.S. Internet Index, which measures the performance of Internet stocks with a market value greater than $250 million, fell 47 percent between April 13 and August 9, but has since risen about 24 percent. It's up 48 percent this year.
Bloomberg's IPO Index, which measures the performance of stocks during their first publicly traded year, is up 19 percent from August 9.
Even with some poor debuts, initial sales this month rose 37 percent on average in their first day. That put August ahead of June, the worst month, when the average was 33 percent.
The average gain was 97 percent in January, 52 percent in February, 76 percent in March, 69 percent in April, 50 percent in May, and 54 percent in July, according to Rich Peterson of Securities Data.
"This is not the first nervous August for technology stocks," said Greg Belmont, a partner with New York-based Grand Central Holdings, a venture capital firm that invests in Internet and other businesses.
Uncertainty about interest rates contributed to investors' hesitation this month, he said.
Companies that are building the Internet's infrastructure will likely get the most enthusiasm, said Brentwood's Walecka.
Walecka is forming a venture capital firm later this fall with venture capitalists from his company and from Institutional Venture Partners, another Silicon Valley venture capital firm, to invest in high-speed Internet access companies.
The proposed $6.9 billion purchase by Cisco Systems of Cerent, which makes equipment for routing phone calls and Internet traffic through fiber-optic lines, has increased investors' interest in infrastructure-related Internet companies.
That's because of Cisco's high valuation of Cerent, which lost $29.3 million in the first half of this year on sales of just $9.9 million.
"There's a huge appetite for the next generation of truly franchise companies, supporting the next generation of broadband Internet," Walecka said. "It's a gold rush--you want to stake your claim."
The success of Redback Networks and Juniper Networks has helped whet this appetite, he said.
Sunnyvale, California-based Redback Networks, whose equipment makes it easier for phone and cable companies to manage high-speed Internet services, is up 409 percent from its offer price as of yesterday's close. Mountain View, California-based Juniper Networks, a maker of high-speed switches for the Internet, is up 541 percent. Redback Networks began trading on May 18, and Juniper Networks on June 25.
Business-to-business e-commerce remains another favorite of investors, Walecka said. The success of Sunnyvale, California-based Ariba, which uses the Internet to help businesses buy office equipment and supplies, is one example, he said. Ariba is up 472 percent from its offer price. Ariba began trading on June 23.
Redback, Juniper, and Ariba "are all going to build big businesses," he said.
Some areas of Internet consumer commerce remain attractive too, though investors worry that the ease of setting up e-commerce companies allows competitors to quickly challenge the dominance of initial players.
Competition for capital is likely to increase with IPOs by two well-known companies--Paul Allen's Charter Communications, a cable-TV operator, and United Parcel Service.
Companies that provide services to the college market, such as the delivery of textbooks, and which deliver pet supplies or luxury goods, will also attract attention, Belmont said.
E-commerce companies that are already public will be carefully scrutinized for their performance in the year-end holiday season, he said.
One important contest is between the Amazon.com e-commerce model of selling many different types of goods over the Internet, and the EToys model of focusing on one segment.
A win for Amazon will vindicate the importance of using a brand broadly, while a win for EToys will support an argument for narrower markets, he said.
Some venture capital investments in companies nearing a public offering have taken longer to complete since Internet stocks began falling from their April high. That suggests Internet entrepreneurs are valuing their companies for somewhat less than they did before April, which may result in cheaper prices for investors at the IPO, he said.
Price reductions took place with some IPOs this month. Both Palo Alto, California-based Bamboo, which allows people to shop for real estate online by viewing panoramic images of property, and Bellevue, Washington-based ImageX.com, an online provider of commercial printing services, reduced the expected prices of their shares. Bamboo had planned to sell 5 million shares for as much as $12 each but ended up selling 4 million shares at $7 each.
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