June 13, 2000
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Global Cooling
Internet firms and investors shift strategies amid a world-wide chill in dot-com enthusiasm.
Gravity wins.
For much of the past five years, Internet firms went up and up and up, both in the hype and valuations they generated. But a deep downturn in technology stocks since mid-March, and investors' new focus on profitability, has brought many of these highfliers back to earth.
As a result, investors from New York to Frankfurt to Hong Kong are taking a tougher, more critical view of fresh initial public offerings. Dot-coms are desperately seeking private funding to stay afloat. At the same time, however, venture-capital firms are more selective about whom they back -- and how much cash they're willing to invest.
More tough times lie ahead. The IPO market has shown little sign of reviving, even as volatile technology shares have bounced from their lows, posting strong gains in June.
"Every week is different," says Peter Sederowsky, who sits on boards of European Net companies including Steelscreen AB and QXL.com PLC. "Everything is in turmoil," he says.
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By WSJ.com reporters Jeanette Borzo in Paris, Connie Ling in Hong Kong, Danielle Sessa in New York and Cecile Gutscher in London.
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Though this new uncertainty stretches world-wide, the impact of dot-com disillusionment has taken different forms. In the U.S., the IPO market has sharply slowed, and several closely held firms have gone out of business for lack of funding. Europe's IPO market is just as lukewarm as the U.S., but getting private funding has proved even tougher for start-ups: Europe's Boo.com has been the most high-profile Net failure so far. Asia -- the least mature of the three markets -- hasn't seen any big flops, but has seen increasing reticence from public and private investors.
Just as the symptoms' seriousness has differed from company to company and country to country, so will the medicine.
Shallower Roots
This reassessment of Internet companies is especially deep in Europe, where the Internet's roots haven't taken hold as firmly as in the U.S., due to lower personal-computer penetration and high telecommunications charges.
Interestingly, many investors on the Continent have decided that Old Economy companies are better positioned to flourish on the Internet in Europe than was the case in the U.S.
"The first flush of e-businesses were pure-plays, [venture capital]-funded, defining a new way of working and catching bricks-and-mortars companies asleep at the wheel," says research director Andy Kyte of research firm Gartner Group in London. "The second wave of investment is serious, old money from bricks-and-mortars companies."
For example, Barclays PLC last week announced a 325 million pound ($490 million or 513 million euros) investment in various e-commerce initiatives for this year. Tellingly, the high-profile European IPOs that have stayed on track include Prudential PLC's Egg online-banking unit; Deutsche Telekom AG's T-Online International AG operations; and France Telecom SA's Groupe Wanadoo SA unit. (T-Online went public in April; Egg held its IPO Monday; and Wanadoo's IPO is slated for midsummer.)
Other Old Economy companies are thinking along the same lines. Spanish electricity-based conglomerate Grupo Endesa plans to float its business-to-business e-commerce unit before year end. And Bertelsmann AG, the German media group, is drawing up plans to merge its bol.com online bookstore with Barnes & Noble.com Inc., the U.S. e-commerce business in which it has a minority stake.
Watching the Clock
Meanwhile, across the pond, start-ups are no longer delivering instant windfalls for investors. In the U.S., more than 30 Internet-related IPOs have been pulled or postponed in the last two months -- twice the number of deals that were completed.
Among the companies to delay deals were well-known firms such as CMGI Inc. unit AltaVista Co., which now plans to go public in the fall. Just Friday, online telecommunications exchange Arbinet Holdings Inc. withdrew its $115 million offering.
In Asia, several IPOs have been pulled, including Hong Kong's ColbyNet Ltd. and a giant deal from Vodafone Pacific Pty. Ltd., which was expected to raise between $1.3 billion and $2 billion. The handful of Asian IPOs that made it received generally weak receptions from the market.
"The market is not looking at what you're going to do, it wants to look at what you've done," says Bill McFarlane, managing director of travelstore.com, a London-based travel agency focused on business travel in the U.K. and Germany. "Forget the sizzle and show us the steak."
For companies that have had to pull their IPOs, many have found that their venture backers have tightened the purse strings and shifted strategies.
This can be a bitter pill for firms like U.K. video retailer BlackStar.co.uk. It dropped plans for a 50-million-pound IPO. Now, the company (www.blackstar.co.uk) hopes to raise 10 million pounds to 12 million pounds from private investors.
"I think you become a more discriminating investor in a different market," focusing more intently on management teams and business models, says Norman Fogelsong, general partner of Institutional Venture Partners. His firm has funded Internet firms Juniper Networks Inc. and Ask Jeeves Inc., among others.
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