ALL - Interesting reading on Buying Internet IPOs:
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SOURCE: FORTUNE INVESTOR
How to Buy an Internet IPO
Julie Creswell
<Picture: S>o the most responsible Internet play right now may well be AOL, as our panelists suggest. But let's talk Net fantasies for a moment. The coolest investment coup by far would be to get in on the ground floor of the next Broadcom or VeriSign by investing in its IPO. Broadcom, which supplies semiconductors that help cable companies provide Internet connections, has leaped 148% since its mid-April IPO. VeriSign, which makes encryption software for Internet commerce, jumped 146% from its offering price back in late January. How can you get a piece of that action?
Well, it won't be easy. The fact is, demand for shares of hot IPOs usually wildly outstrips supply, and the investment banks underwriting the deal can pick and choose who gets a crack at shares. Their preference is to place the new stock only in "strong hands"--institutions that are going to hold on to the stock and, incidentally, are also likely to send lots of trades to the underwriters' brokerage colleagues. The next group to have dibs on the IPO are the brokerage's top customers: well-heeled, active traders.
If you're neither of those, the only IPOs you're likely to see will be second- or third-tier offerings. Here it's probably wisest to practice a form of the Groucho Marx theory of club membership: Be skeptical of any IPO that wants you as a subscriber. That's especially true of an offering being sold by cold-calling brokers or directly by the issuer. Even if the stock really has solid prospects (a long shot), it won't have either the imprimatur of a major underwriter or Wall Street coverage. Without those, it won't have the liquidity or the buzz it needs to be a success for investors.
For the sake of argument, let's say you do have a shot at a few shares of a legitimate IPO. In that case, get your hands on the deal's prospectus and turn to the financial data. The pre-Internet rule of thumb was that a company needs at least three quarters of profitability and $30 million in annualized revenue to be a viable IPO. See what money your company has made, but be aware that internet startups generally lack much of a history in that regard. In these cases, "you look at the nonfinancial factors, such as the quality of management, the strength of the corporate culture, how they're paying employees, and whether that pay is tied to corporate goals," says Kevin Virostek, national director of IPO initiatives at Ernst & Young. "You have to look past the numbers, or lack of them, and find out what's really inside."
Take a look, for instance, at the IPO filing for Internet software reseller software.net. There you learn that revenues climbed to $17 million in 1997 from $6 million in 1996, but its losses totaled $13.1 million by this spring. Under the lengthy section called "Risk Factors," you'll find that part of the IPO's proceeds that will pay off advertising contracts with AOL and Excite. In addition, under the eye-catching title "Anticipated Losses and Negative Cash Flow," you'll discover software.net expects to run in the red for the "foreseeable future" as it develops its brand. None of that is exactly great, but it's no worse than Amazon.com before its IPO.
Turn to "Management" on page 48 and other warning signs flash: Most of the team running the firm joined in just the past two months, including the president and chief executive officer, Mark Breier (who at least spent a year as a vice president of marketing at Amazon.com, but prior to that served at Cinnabon World-Famous Cinnamon Rolls). Kathleen Smith, co-manager of the IPO Plus Aftermarket fund, a no-load mutual fund, shrugs off the team's short tenure. What does concern her, though, is that software.net will be going up against the likes of CompUSA, Egghead.com, and even Amazon.com, which have much stronger brand identities, if rather less experience in the upper ranks selling cinnamon buns. "We'd worry about Amazon and we'd also look at online music retailers as possible competitors," she says.
Still, Smith believes in the company's underwriters (the lead manager is DMG, whose boss is profiled here a few pages later). The fact that software.net has actually posted sales figures in its brief lifetime also boosts Smith's confidence that the IPO will get an enthusiastic reception. That's the beauty of going public with an Internet company in a red-hot Internet market.
Issue date: June 8, 1998
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