Back to basics: good product, good management, good earnings and future growth. What can you ask more?
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Sunday May 7, 2:26 pm Eastern Time
IPO VIEW-New issues wait before entering changed
market
By Denise Duclaux
NEW YORK, May 7 (Reuters) - Companies planning to go public remain sidelined amid stock market gyrations sparked by
the threat of a sharp interest-rate hike and await stability before entering what it is expected to be a changed environment for
new issues.
``Right now, it's a time of caution,'' said Ward Morgenthau, a senior vice president with Laidlaw Global Corp. ``You have to
get the rest of the ship on an even keel before you can get the little vessels going. I think the IPO market is looking for signs of
stability in the Nasdaq and the general market.''
While no one is certain when the once-bustling initial public offering market will pick up its pace, some doubt it will be any time
soon. Last week, a slew of companies, including Annuncio Software Inc., Techies.com Inc., Beatnik Inc. and Linuxcare Inc.,
filed to withdraw their planned initial public offerings and pointed to unfavourable market conditions as the culprit.
``We believe the IPO market won't pick up in force until the fall,'' said William Buchanan, head of equity capital markets at SG
Cowen. ``There will be some activity through the next few months, but true stability usually takes several months to be
established.''
When companies do begin to hit Wall Street in full force, ``older economy'' companies are expected to enter the fray as
high-flying technology companies come down to earth. The technology-loaded Nasdaq composite index is still off 6.2 percent
for the year. The Nasdaq, as well as blue-chip gauge Dow Jones Industrial Average, remain rocky ahead of a Federal Reserve
meeting on May 16 that will determine whether interest rates will rise.
``In the last year and a half, the IPO market has been largely synonymous with tech stocks and the tech stock valuations have
gotten clobbered in the last two months,'' said Jay Ritter, a professor of finance at the University of Florida.
``It's conceivable that even if the Nasdaq stayed down, if the valuation of other sectors went up a more diverse group of firms
might go public rather than being so tech-oriented.''
Indeed, Krispy Kreme Doughnuts (NasdaqNM:KREM - news) has managed to swing higher in the face of market volatility,
while many technology start-ups have been hammered by skittish investors. Shares of Krispy Kreme, which priced at $21 per
share in April, closed at 44-7/8 on the Nasdaq on Friday.
``If you look at Krispy Kreme, granted it's a small float, but it's done very well in the after market,'' said Kenan Pollack, money
editor at Hoover's Online. ``It's a well-run company, and people understand the product. It's back to the basics.''
Wall Street will also likely demand that businesses seeking a public listing have an operating history extending more than a few
months back - and the financial results to prove it. The initial public offering market has been flooded with start-ups eager to
enter the market while demand for newly public companies was still hot.
``(Investors) will look for business models where there is a clearer path to profitability and, importantly, cash flow,'' said
Christopher Ely, co-manager of Loomis Sayles Small-Cap Growth Fund.
``I think they will reject or look askance at business models built on continuing to come back to the markets on a very regular
basis for incremental cash...,'' he added. ``I think more fundamentally solid companies will be coming public.''
And the new-issues market, which during its heyday saw many companies tripling and even quadrupling in their first days of
trading, will likely pull in more modest first-day gains in the face of discerning investors.
``I'd be surprised if we ever see a frenzy like that again,'' Ritter said.
This week, the initial public offering calendar continues to be light. Among the deals tentatively scheduled to begin trading are
Netease.com Inc., an Internet company that offers Chinese language-based content and e-commerce services, and
DigitalWork.com Inc., which provides Internet-based business services to small companies.
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