Internet-IPO Boom Falls Under Its Own Weight
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
One of history's most spectacular IPO booms is sagging under its own
weight.
Despite a bounce-back in beaten-up Internet-related stocks and one
IPO's doubling Thursday, the recent carnage has left a lot of once-sizzling
new stocks looking like losers.
Of 156 Internet-related initial public offerings
this year, 37% were below their offering price
as of Thursday's close, from fashionmall.com
(down 58%) to TD Waterhouse Group (down
31%), according to data compiled by
CommScan LLC, a New York analytical firm
that follows new securities issues.
The performance is even worse when compared with the first day of
trading, when investors left out of the IPO get their first chance to buy,
often driving the stock higher. Fully 68% were below their first trade price
after going public, and 70% were below the price at which they finished
their first day of trading. The average Internet-related IPO this year is
down 51% from its 52-week high, according to CommScan.
Jay Ritter, a finance professor at the University of Florida, Gainesville, and
an expert on IPOs, says it has long been expected that, as in other IPO
booms, the Internet would produce "a couple of big winners like eBay and
an awful lot that just aren't going to turn the corner. As with biotech stocks,
from the start everyone was expecting most would fizzle."
How High-Tech Honchos Have Fared
How the value of holdings* of tech executives has fallen since their stocks
peaked. Figures are in millions.
Executive
Value at
52-week
high
Current
value
% change
Jeff Bezos, Amazon.com
$13,003
$5,715
-56%
Margaret Whitman, eBay
1,599
635
-60
Steve Case, America Online
676
321
-53
James Cramer, TheStreet.com
220
57
-74
Tim Koogle, Yahoo!
100
52
-48
Eric Benhamou, 3Com
21
9.7
-54
Joseph Nacchio, Qwest Comm.
9.4
5
-47
*includes exercisable options
Source: First Call/Thomson Financial
But with Internet stocks, the separation of wheat from chaff may be
happening more quickly than in other booms: "It might be a manifestation
of Internet time," he says.
Keith Mullins, head of emerging growth-stock research at Salomon Smith
Barney, adds: "I wouldn't say you've broken the new-issue market yet, but
if new transactions start to fail, the window shuts very quickly."
Investors are also becoming pickier, he says. "A lot of fund managers who
were feeling confident about the year have given up a considerable part, if
not all, of their gains for the year. There's also deja vu involved: 'I saw this
movie last year and it was a horror film.' It's having a very eerie effect on
investor psychology."
Last year's Russia crisis, which began in August, pounded U.S. stocks,
especially those of small and new companies, and led to an extended
period in which no companies went public.
It is hardly that bad yet, but some companies are choosing not to brave the
waters now. Late Wednesday, DSL.net, a New Haven, Conn., provider
of high-speed Internet-access lines to small and midsize businesses,
postponed its IPO that was to raise as much as $132 million.
"The market has been a little rocky lately," says Chief Executive Officer
David Struwas. He notes that three other firms offering, like his,
digital-subscriber-line services -- and that went public this year -- all had
their stocks hit hard in recent days. In addition, almost all of Tuesday's
IPOs fell from their offering price. (Thursday, the most notable of those
losers, 1-800-Flowers.com, fell an additional $1 to $16, down 26% from
its offering price.) "We wanted to treat our investors better than that."
He admits to feeling unlucky in his timing but is confident the IPO can
proceed later this fall. Though 17-month-old DSL.net posted a loss of
$6.5 million on revenue of $184,173 for the first six months of this year,
Mr. Struwas said its balance sheet is strong. "We can afford to wait."
Thursday's crop of IPOs was a mixed bag. After months in which Internet
IPOs routinely doubled or tripled, the only barnburner Thursday was
Internet Capital Group, a holding company for several
electronic-commerce firms, which more than doubled to $24.4375 from its
offering price of $12.
But such performances are no longer routine -- as the surprise tumble in
four Internet IPOs on Tuesday showed.
Thursday, Cobalt Group, which provides Internet marketing and
data-collection services to automobile makers and dealers, fell $2.6875 to
$8.3125 from its offering price of $11, which was lower than the $13 to
$15 expected price range.
Interactive Pictures, whose offering price was boosted to $18 from an
initial range of $12 to $14, rose $1 to $19 Thursday, its first day of
trading. James Phillips, chairman and CEO of the Oak Ridge, Tenn.,
provider of interactive photo services over the Internet, admits to having
been nervous about the falling market over the previous few weeks'
preoffering roadshow with investors. "I still am," he said Thursday, after
watching his stock start trading, amid a gyrating Nasdaq Stock Market,
from the offices of lead underwriter J.P. Morgan & Co. But he said the
firm, also known as IPIX, never considered withdrawing or delaying its
IPO. IPIX lost $8.9 million on revenue of $3 million in the first half of the
year.
The IPO of homestore.com, which runs a series of real-estate Web sites,
rose $2.75 to $22.75 from its offering price of $20, which had been
boosted from an initial range of $8 to $10. CEO Stuart Wolff says he paid
little attention to the market during the company's roadshow, which ended
in Texas on Wednesday. "If you follow it on a daily basis as a CEO, you'll
kill yourself." He flew to New York in time to see trading begin Thursday
at the offices of lead underwriter Morgan Stanley Dean Witter & Co. "It
felt great. It was mission accomplished."
According to its prospectus, homestore.com, a Thousand Oaks, Calif.,
firm that raised at least $140 million in its IPO, lost $28.8 million on
revenue of $16.6 million in the first six months of this year.
Follow-on and secondary offerings are suffering more than the IPO
market. A spokeswoman for OnHealth Network, which provides health
information over the Internet, said Thursday it was deferring a follow-on
offering until next week, citing "uncertainty and volatility in the stock
market" and Friday's U.S. employment report, expected to influence
whether the Fed raises interest rates later this month.
LSI Logic, a big Milpitas, Calif., semiconductor manufacturer that isn't
even an Internet company, also announced that instead of offering about
$300 million in convertible debt and $300 million in stock, it would file a
shelf registration to raise the money later this year. "We were really
concerned at the way in which the stock was behaving," said Chairman
and CEO Wilfred Corrigan. Between the overhang of expected new
shares and the weakness in technology issues, LSI stock had come under
pressure in recent days after enjoying a strong run-up through the first half
of the year. It bounced back $4.1875 to $51.6875 Thursday, in part
because of the postponed stock sale.
Mr. Corrigan said LSI had taken on more debt this year than it typically
carries to complete an acquisition, and the offering was meant to pay that
down. But "this is not an offering that we need to do at this point in time."
Whether the market will be any more receptive to new stock offerings later
this year is anyone's guess, since so much depends on how the overall
market fares in the face of a possible increase in interest rates by the
Federal Reserve.
Some investors like Tom Pence, a fund manager at Conseco Capital
Management, say the moment of Internet companies has passed. "So many
of these companies have been coming whose original claims were of
disintermediation. Well, it's hard to make the claim you're going to go in
and disintermediate an industry when a few months after your IPO, three
or four more companies come along and say they'll disintermediate you."
But Mr. Ritter notes that claims that the Internet phenomenom would die
under the weight of new supply have proved wrong for the past six
months. "I'm not willing to bet the ranch on whether we're in just a
temporary dip or not." |
