it can't happen here...The buyer of all Goldman Sachs-led U.S. IPOs since Jan. 1, 1999, would find his stock down a whopping 22.41% from their first-day closing price,...
April 26, 2000
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Burnt Offerings? Debuts
Are Fizzling After Pop
By TERZAH EWING
Staff Reporter of THE WALL STREET JOURNAL
IPO-rocket.com has been followed quickly by crash-and-burn.com.
Despite the frenzy by investors to buy initial public stock offerings -- and the hefty fees pocketed by Wall Street underwriters -- the average IPO since the beginning of 1999 has fallen 4.3% based on the performance of offerings from their first-day closing price.
The IPOs of the top two underwriters, powerhouses Morgan Stanley Dean Witter & Co. and Goldman Sachs Group Inc., have fared even worse from the first-day close. The buyer of all Goldman Sachs-led U.S. IPOs since Jan. 1, 1999, would find his stock down a whopping 22.41% from their first-day closing price, while investors in Morgan Stanley-led deals would be 8.78% underwater.
Including the first-day moonshots, the average IPO is still doing well, with a return of 72.3% over the offering price. And from their offer prices, Morgan Stanley and Goldman's average deals are up 199.69% and 81.16%, respectively. But that's of little solace to many small investors, who can't get shares at the IPO price because most stock is allocated to institutional investors and favored individual investors with ties to the issuing company or the underwriter.
Part of the blame for the poor performance of IPOs after their first day of trading, of course, rests with the topsy-turvy market of the past few weeks, which has turned some winners into losers. The Nasdaq Composite Index, the most-watched benchmark for technology stocks, is in a bear market, even after Tuesday's 6.57% gain. Because the majority of IPOs in the last year and a half have been technology or Internet-related, many of them have fallen the hardest.
But some underwriters did worse than others because their offerings were concentrated in sectors that have gone out of favor faster. Goldman Sachs is among the worst among the top-10 underwriters because it led IPOs of many Internet retailer and content companies, also known as business-to-consumer, or B2C, companies. Goldman-led IPOs include eToys Inc., down 67.3% from its offer price; TheStreet.com Inc., down 67.1% and barnesandnoble.com Inc., down 44.6%. Dragging down the performance of Morgan Stanley IPOs were losers such as HomeGrocer.com Inc., down 61.5% from its offer price; drugstore.com Inc., down 51.4%, and Women.com Networks Inc., down 50%.
See more in-depth information on initial public offerings.
"Who knows, a year from now Morgan Stanley, which has a big share of the [Internet] infrastructure companies, might be looking really bad because that's been the fad du jour," says Jay Ritter, a professor at the University of Florida who studies IPOs.
For its part, Goldman defends the performance of its IPOs by pointing to its longer-term record. Stuart Bernstein, head of technology equity capital markets at Goldman, notes that from the beginning of 1995 through Monday, Goldman's average Internet IPO had more than sextupled. He also says that many of the company's Internet deals -- eBay Inc., up nearly 2,500% from its 1998 IPO price, and Inktomi Corp., up 3,054% from its 1998 IPO price -- have been great successes, among the best-performing IPOs ever.
As for the recent poor performers, he defends them, claiming that most of them have beaten or exceeded financial and operational expectations. "What we strive to do is not pick the flavor of the month," he says. "We try to underwrite the highest quality companies in their respective spaces. It's easy with 20/20 hindsight to say, 'Boy, B2C was going to be out of favor,' but virtually no one at the time these offerings took place was saying that. Both underwriters and investors were enthusiastic about this set of companies."
A Morgan Stanley spokeswoman, reading from a prepared statement, said, "The aftermarket performance of the B2C companies we have brought to market is on par with the performance of the overall sector."
Officials at other underwriting firms whose IPO performances were hurt by dot-coms also maintain they wouldn't have done anything differently. Duff Anderson, head of equity capital markets at Donaldson, Lufkin & Jenrette Inc., whose average IPO since the beginning of 1999 has dropped 14.3% from its first-day closing price, says: "Branding was so important. You wanted to be a first mover. To have not done them would have been to compromise their business plans prematurely. We encouraged those companies, and we don't regret it."
And what about the investors who got bitten when these deals turned south? Mr. Bernstein of Goldman counsels investors to think before they buy. "What we recommend to all investors is that when they buy in the open market the first day [that] a security begins to trade, they should think about how much they want to pay," he says. Specifically, he recommends buying with limit orders, which allow an investor to set a maximum purchase price, rather than a market order, which has resulted in investors paying a higher price than they expected.
Responding to the idea that fewer individual investors can get IPO stock allocations at the offer price, the Morgan Stanley spokeswoman, in a statement, said, "This year a greater proportion of our IPO shares have been allocated to the retail sector. Year to date we have increased the allotment by 55% as compared to 1999."
While the poor numbers posted by many recent IPOs might seem surprising, it is in keeping with past studies that have shown that historically most IPOs don't fare well after their first six months or so. Most, in fact, end up underperforming the larger market over the very long term. Mr. Ritter of the University of Florida notes that companies taken public between 1970 and 1997 had an average annualized return of 10% in the five years after their IPOs, vs. 15% a year over the same five years for similarly sized companies that were already public.
Some of the latest crop of IPOs, despite the hype surrounding their early performance, already show signs of lagging. VA Linux, an Internet company whose stock jumped a record 698% on its first day, has since fallen 84% from its first-day close, and is now up only 33% from its IPO price. VA Linux's IPO was underwritten by Credit Suisse Group's Credit Suisse First Boston, which declined to comment. Taken as a whole, CSFB's IPOs since the beginning of 1999 have risen just 1.4% from their first-day close, and risen 128.8% from their offering price. CSFB is the third-biggest underwriter after Morgan Stanley and Goldman Sachs.
Among the top 10 underwriters, 10th-ranked Deutsche Banc Alex. Brown, a unit of Deutsche Bank AG, fared best, with a positive return of 25.1% for its IPOs from the close of their first trading day; overall its IPOs since the beginning of 1999 are up 88.9% from their offer price.
How did Alex. Brown do it? For one thing, by not putting all of its eggs in one tech basket. It mixed some flashy dot-com deals (including iTurf Inc., down 76.4% from its offer price) with other kinds of tech companies (Proxicom Inc., now more than double its offer price) and some Old Economy successes like Krispy Kreme Doughnuts Inc. (now trading at double its offer price).
Doug Baird, co-head of equity capital markets at Alex. Brown, says another key aspect of the IPO strategy was keeping the first day's trading organized, particularly by executing many retail market orders, or orders to buy at the current price, at the opening price. That protected investors of all stripes from some of the surprises of a sudden upward move.
The other key, he says, was not getting carried away over the sheer number of deals available in the last year and a half. He says, "We tried hard to avoid becoming a bull-market bucket shop that took public anything that could go public." |
