IPO Millenium Milestones
Unprecedented prosperity and a revolution in technology are fueling one of the strongest periods of equity capital raising in history---the current IPO bull market. Record setting is an apt description of 1999?s IPO market action. The amount of proceeds raised was unprecedented at $93 billion, easily eclipsing the previous record of $57 billion set in 1996. Valuations also grew, with the average IPO raising $190 million through the equity capital markets versus the previous record set last year of $181 million. A total of 486 IPOs debuted in 1999, the most since 1996?s 502 pricings.
Investors were richly rewarded. Average returns from the offering prices were a gargantuan 187%, of which 118% occurred on the first day. The ebullience generated by initial first day pops spilled over into the aftermarket, driving 69% trading gains from the first day close. In fact, IPOs achieved a landmark feat by outpacing the 41% total returns of 1995, the best year on record for returns from the offering.
For The Record: 1999?s record setting IPOs
Largest Foreign IPO: ENEL SpA - $16.5 billion proceeds raised
Largest Domestic IPO: UPS - $5.5 billion proceeds raised
Best Aftermarket Returns: Digital Island +1,084% aftermarket gain
Biggest First Day Gain: VA Linux +698% first day gain
Trading at Internet speed: the emergence of the individual investor as a major market player
It is estimated that individual investors now directly own 40% of all publicly traded outstanding common equity. That number rises to 56% if mutual funds are included.
Online investors and day traders, armed with the latest and greatest information and trading tools, courtesy of the Internet, have made their presence felt in stocks that have small floats or are thinly traded, particularly IPOs.
The dynamics of price action take precedence over underlying business fundamentals causing stocks to whipsaw as day traders quickly move in and out of stocks, eager to catch the next great move in the next have-to-own stock.
No earnings, no revenues, no products, no history: story stocks, theme investing, and John Q. Public as venture capitalist of first resort.
Internet IPOs typified 1999?s IPO market. Though Internet IPOs only represented 50% of ?99 IPOs, their volatility and lack of standard metrics of operating performance became the norm for new issues. They reintroduced the term, story stock, to the investing public?s lexicon. Story stocks, so-called because they lack standard metrics of operating performance like earnings, revenues, or even a product portfolio, trade based on speculation and news of emerging economic, technological, or demographic themes and trends likely to drive future business opportunities.
An astounding 57% of all ?99 IPOs were founded less than five years ago. In years past, venture capitalists and friends and family germinated these early stage companies. In 1999, John Q. Public became a venture capitalist, but without the advantage of having cheap stock.
73% of IPOs had no earnings. 63% of these IPOs were Internet issuers. The average IPO with no earnings generated $138 million in sales and had -$24 million of net losses. This sales statistic is skewed because of the inclusion of some large companies in the capital goods and energy sectors. Average market capitalization stood at $2.1 billion with a price-to-sales ratio of 15.5x. As a group these IPOs generated 224% returns, on average.
By comparison, IPOs with earnings generated 90% total returns.
Performance by sales level
IPOs in 1999 tended to have lower sales than in the past. 81% of 1999?s IPOs had less than $100 million in sales. Of this group, the average company had $21 million of sales and -$14 million of net losses. This group of IPOs sported an amazing average market capitalization of $1.8 billion, good for a price-to-sales multiple of 84x. They also sprinted to a 223% return from the offering, on average.
20% of IPOs had less than $5 million in revenues: 85% of these IPOs were Internet issuers. These IPOs registered 192% gains, on average.
7% of IPOs had less than $1 million in revenues: 76% of these IPOs were Internet issuers. This group of new issues advanced 146% from their offering price, on average.
The fastest growing companies were rewarded with the best performance: the "dot coms" versus the "not coms"
It?s easy to see why the market?s appetite for Internet IPOs was insatiable during 1999. No other industry even came close to delivering the moonshots of the Web deals. The Net IPOs produced a hefty 233% upside from the offering.
Far off the pace of the Net stocks, but still quite respectable, were the telecom IPOs with their 168% gains. The current infatuation with everything wireless and broadband stems from the promise that these companies hold as linchpins for the extension of Internet capabilities to mobile electronic devices.
Media deals, paced by the likes of MIH and United Pan Europe Communications, rewarded investors with 81% returns.
Investors in healthcare deals also had reason to cheer this year. For the first time since 1997 players in this arena could say they made money at the end of the day. Healthcare produced 81% gains.
The return of aftermarket performance
Unlike some previous years, it was possible for individuals to make a decent return without necessarily buying on the IPO. Investors who took positions in IPOs after the first day made a 69% return on their investment, on average.
Investors who bought Internet IPOs in the aftermarket logged average aftermarket gains of 86%.
Telecommunications deals yielded 59% trading run-ups, media-related new issues garnered 43% aftermarket premiums, and healthcare and biotech companies returned 43% from the first day?s close.
Retail IPOs were one of the real laggards of the bunch, giving back an average of -21% of their opening day pop in subsequent aftermarket trading.
The Haves and the Have-nots: selectivity in the marketplace rewards winners and punish laggards
Despite the overall positive trajectory of the IPO market, 22% of 1999?s deals fell below their offer prices. The performance chasm between winning IPOs and broken IPOs widened. Momentum became the name of the game as the tendency increased among investors to chase high fliers and discard losers.
Of the 106 deals that broke their offer prices, the average decline was ?31%.
Of the deals that traded above their offer prices, the average gain was 251%.
Big companies get in on the action
93 companies, representing 19% of 1999 IPOs, carried proposed post-offering market values in excess of $1 billion.
IPOs of big companies with real businesses became more prevalent during 1999. All told, 50 issuers, accounting for 10% of 1999 IPOs, had proposed market values in excess of $1 billion and sales in excess of $100mm. These companies under-performed the broader IPO market with an average return from the offering of 44%.
Foreign issuers invade U.S. shores
46 foreign companies went public, accounting for 9.5% of 1999?s deal count.
The average foreign IPO provided a 164% return from the offering.
Deals tended to be large, with the average offering size at $891 million and an average proposed market capitalization of $4 billion.
Buzzwords that captivated the market
B-to-B
DSL
Broadband Internet Infrastructure
Linux
IP telephony
Wireless
Genomics
Tracking Stock
IPO Ideas
The IPO market remains on vacation at least another two weeks. Look for the first deals of 2000 in the week of January 10 or January 17.
In The Pipeline
Once the market gets going in 2000, however, we should be swamped with deals. The pace of new filings continued to be very brisk last week. Among the more interesting filers were Generation Y web sites Snowball.com (SNBL) and Bolt (BOLT), Internet domain name registrar Register.com (RCOM), search engine Direct Hit Technologies (DHIT), Embedded Support Tools (ESTC), which makes tools for testing and debugging embedded systems, Loudeye Technologies, which makes Internet media software, Niku (NIKU), which provides online sourcing solutions for professional services, Ansell Healthcare (AHX), which makes protective gloves and condems, B2B marketplace for small businesses Onvia (ONVI) and Opus360 (OPUS), a procurement site for IT workers and services. |
