DECEMBER 19, 2000
SPECIAL REPORT--AFTER THE MELTDOWN
Street Wise by Margaret Popper
Return to Reality in the IPO Market | While the too-good-to-be-true days are clearly over, companies that have a viable business model and bankable earnings can still go public
| Nine months ago, Noosh Inc. was in the enviable position of discussing whether to turn away offers of $50 million in venture capital. Never mind that the Palo Alto (Calif.) online purveyor of printing services was planning an initial public offering managed by Goldman Sachs -- king of IPOs. Noosh was sitting pretty with $200 million in sales and had decided $30 million was all it needed. Still, Noosh board member and investor Steven Baloff of venture capital firm Advanced Technology Ventures in Waltham, Mass., convinced the company's management to adhere to the golden rule of venture capital: Always take as much as you can get.
Good thing Noosh did. Even though taking the cash meant giving 10% of the company's private stock to outsiders, the IPO market tanked days after the deal. Goldman immediately advised Noosh to delay its IPO for a year. "If they hadn't taken the $50 million, they'd be almost out of cash right now," says Michael Frank, partner at ATV. "As it is, they still have $30 million or $40 million in the bank."
Not everybody has been so lucky or wise. Along with the Nasdaq, the IPO market is finally returning to normalcy -- which compared to the heady days of 1999, feels like falling off a cliff. Scores of dot-coms are shriveling up and dying because they've run out of money. Investors are no longer snapping up every deal that comes along. And young, innovative companies are being told to get by on what they have -- indefinitely.
FIRST TO FEEL IT. Yet it would be wrong to sound the death knell for the IPO market. While it's true that valuations are much lower and deals are far scarcer, a more realistic tone has set in. To go public in this harsh environment, companies need more than a hot idea and promises of profitability. They need a viable business model and earnings that can be banked. But it can be done.
The current problems started in March, when the Nasdaq correction was beginning. The IPO market was the first to feel the repercussions. First dot-coms, then tech companies, and finally all companies trying to go public watched valuations slide. As first-time issuers of stock realized how low they would have to go on price to get a deal done, the number of postponed or withdrawn IPOs skyrocketed. A quarter of the 702 IPOs filed between Jan. 1 and Dec. 15 have been withdrawn, and more might withdraw early in 2001. By comparison, in 1999, only 15% of the 680 companies that filed between Jan. 1 and Dec. 15 withdrew, according to IPO.com.
Fewer deals may be getting done, but total cash raised from IPOs in 2000 will still far surpass what was raised in 1999. Through Dec. 15, the 413 IPOs that were brought to market raised $100 billion. "That's the best year on record for proceeds," says Jeff Hirschkorn, analyst at IPO Monitor. The 527 completed deals in 1999 raised $68.9 billion. Of course, the most IPOs in one year was 777 in 1996, but they raised a total of only $48.9 billion, according to Hirschkorn.
NO MORE NAME-YOUR-PRICE. IPO money is still going to companies in the technology sector, despite the dot-com debacle. According to IPO Monitor, tech companies raised roughly 57% of IPO funds over the past six months, for a cash total of $23 billion. Tech also accounted for 61% of the total number number of deals -- 125 -- not just the most funds raised. The sector that came in second for total proceeds was energy, garnering $10.4 billion, or 25% of the money raised, but on only 14 deals. Health care saw the second-largest number of deals -- 54 -- but came in third with $3.1 billion, or about 9%, of the total proceeds.
Even though tech still dominates the scene, things have changed considerably since earlier this year when dot-coms could name their price when they went to market. Now different sectors lead the charge. Dot-coms are out, optical networking is in. And biotech is having a big year. Also in vogue are spin-offs of well-known companies, like Resources Connection, the consulting practice of auditing firm Deloitte & Touche, or Infineon Tech, the former Siemens semiconductor unit.
As any investor in IPOs can attest, their performance as a whole has deteriorated significantly. The IPO.com index tracks the most recent 100 IPOs that raise more than $35 million but less than $250 million (that's a pretty good barometer of IPOs because it accounts for the bulk of the deals). On Jan. 3, newly public stocks were trading 180% higher on average within the first three months of trading. By Dec. 18, IPOs on average were trading 1.7% below their offering price within the first three months of trading.
"MIRROR OPPOSITE." Indeed, companies have to lower their stock prices to get their deals done. Eye-popping spikes on the first day of trading are a thing of the past. "[Pricing] is almost the mirror opposite of what it was in the first quarter" of 2000, says Dan McCarthy, analyst at IPO.com. "Back then, almost all the dot-coms raised their price ranges before bringing the deal to market and ended by pricing above that."
McCarthy adds: "Now [issuers] almost all lower their ranges and end up pricing below that." That even includes the debutantes in hot sectors like biotech. When Genvec (GNVC
) went public on Dec. 11, it priced at $9.50 a share. The company's originally desired price range was $14 to $16. It cut that to $11 to $12 just before going to market and finally settled almost 14% below the bottom of that range.
Of course, Genvec fell victim to another market phenomenon. Outfits that don't make money are finding it very difficult to raise funds in the public market. "Investors are steering clear of companies with financial statements similar to the dot-coms'," says IPO.com's McCarthy. "The market is about as fair as it's going to get when it comes to valuing companies that have no cash flow."
For companies that have burned through their last cash infusion, that's very bad news. But for investors, it means a healthy return to reasonable valuations and IPOs that are no longer a substitute for venture capital with its inherent risks.
Popper covers the markets for BW Online in our daily Street Wise column
Edited by Beth Belton
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Copyright 2000, Bloomberg L.P.
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