(COMTEX) B: Chicago Tribune Barbara Rose Column
B: Chicago Tribune Barbara Rose Column
Feb 21, 2002 (Chicago Tribune - Knight Ridder/Tribune Business News via COMTEX)
-- If you caught the recent reports about PayPal, a hot new IPO, you could be
forgiven for thinking you were in a time warp.
It's been a long time since market watchers followed a stock offering as if it
were an Olympic event.
Up 54 percent!
Best opening day since 2000!
PayPal is a Palo Alto, Calif., company that offers online shoppers a way to send
money via e-mail. It's a financial-services company that hitched its wagon to
Internet auction sites, where it gets most of its 12 million users.
It's not a dot-com, but the buzz surrounding PayPal's Nasdaq debut was
reminiscent of the roaring '90s. Ditto the company's financial profile:
Rollicking growth. Huge losses. Not a penny of earnings.
PayPal's investment bankers offered their customers a chance to get in at the
ground-floor offering price of $13 per share--about 3 1/2 times the average
$3.79 price paid by PayPal's stable of private backers and founders.
PayPal opened for trading Friday above $15, soared above $22 and closed at
$20.90.
Don't get greedy; sell now, advised online commentators when PayPal's newly
issued shares turned over twice on opening day.
Of course, they were right.
Wednesday, PayPal closed below $18, and it's not likely to hit $20 again soon.
The company faces a pending patent suit, challenges from state regulators who
say it ought to be regulated like a bank and competition from big players like
Citibank.
Still, PayPal provided a nice pop for IPO speculators. And it yielded big paper
gains for the company's private backers, which include Chicago's Madison
Dearborn Partners, which invested about $4 per share for its 4.6 percent stake
back in April 2000.
Private backers can't sell their shares for at least six months because of
underwriting agreements designed to keep investors from bailing quickly and
sinking a new stock.
Six months is an eternity in Nasdaq time, but PayPal's success has venture
capitalists dreaming again. If fledgling companies can morph into $20 stocks,
says JK&B Capital's Marc Sokol, "Two years from now, you'll start getting 10 and
20 times your money back again."
It's not likely PayPal signals a return to IPO insanity. But it's the first sign
in more than a year that investors are willing to buy what Wall Street calls a
"good story"--a risky stock with a real business but no earnings.
That's not a bad thing, but it's worth reviewing some IPO history and
remembering that IPOs don't offer all investors a level playing field.
Twenty years ago, says IPO expert Jay R. Ritter, a University of Florida finance
professor, big first-day run-ups were rare. Companies priced offerings as high
as possible to get the most cash to grow their businesses.
The average first-day IPO return during the 1980s? Seven percent.
"IPOs were sold, not bought," Ritter says. "Investment bankers had to work to
convince people to buy the company. Investors were buying because [they wanted
to own] Microsoft or Apple or Oracle."
Fast-forward to the late 1990s. IPO shares turned over an average 1.5 times on
opening day. A total of 117 IPOs doubled on their first trading days in 1999,
compared with only 10 such high-fliers in 20 years through 1994. The median age
of new public companies dropped to 5 years in 1999 from the historic 7-year
median.
"IPOs changed from being a way for companies to raise money into a phenomenon in
and of themselves," Ritter says. A way for investment bankers to reward
customers while enriching themselves. A "liquidity event" for venture investors.
Harvard Business School professor Josh Lerner's research suggests that venture
capitalists' knowledge of the companies they back allows them to time their
stock distributions to limited partners so that venture investors often cash out
when a stock is peaking. He advocates better disclosure rules.
"It's a bit like the prisoners' dilemma," Lerner says. "Once one person runs for
the exits, everyone else starts to do the same."
Meanwhile, PayPal is adding some fizz to the swamp of depressed Internet-related
stocks.
And for IPO speculators, PayPal was payday.
By Barbara Rose
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chicago.tribune.com
(c) 2002, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News.
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