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Today's IPOs Are Priced to Move


Maybe the only job tougher right now than being Bill Clinton's spokeswoman is selling new stock on Wall Street. In the first two months of 2000, there were 70 initial public offerings. So far this year? Nine, a low not scraped since 1979. Five of these new stocks are already under water--cold certification that so far, 2001 is an IPO bear market.

What should you make of this? If you've ever wanted to buy a new issue, now's the time to get serious. For prospective IPO buyers, "this really is the best time, because there is no competition for these deals," says Linda Killian, a partner at IPO investing boutique Renaissance Capital and co-author of the new book IPOs for Everyone, (Wiley, $27.95). "They get priced to move."

You need only look at the latest company with courage enough to push ahead with an IPO, Loudcloud. It's the Internet-services outfit that's best known as Act II in the charmed life of Netscape Communications co-founder Marc Andreessen. It may seem like a century ago, but Netscape christened the Street's Internet era in 1995 when its IPO zoomed, making Andreessen a 24-year-old cyber-tycoon. By the time America Online (AOL) bought Netscape less than four years later, the stock had split, and its value had septupled.

Absent these facts, Loudcloud would not be going public in an early March deal led by Goldman Sachs (GS). And Loudcloud is far from the choicest IPO Goldman has ever sold. Its consulting and outsourcing for companies aiming to do business on the Net yielded $180 million in losses on less than $7 million in sales in its first 14 months. Yes, Loudcloud has marketing deals with AOL, Compaq Computer (CPQ), and Accenture (formerly Andersen Consulting), yet it sees no profit on the horizon.

Even so, the manic-depressive nature of the IPO market would have let Loudcloud go public on far better terms before the blues set in. Last fall, Loudcloud had envisioned going public with an indicated market value of nearly $1.2 billion. Now, that has been slashed almost in half, to $612 million. And public investors will be getting more for their money. Instead of giving up 10% of the company as originally planned, Andreessen and Loudcloud's other existing shareholders will be selling nearly 30% of the the company's equity.

DILUTION. Look at it this way: Had Loudcloud gone public last fall, buyers would have paid an estimated $11 per share. In return, they would have received a share of stock that represented just $2.18 in tangible book value. Wall Street's word for that is dilution, and it would have washed away more than 80 cents on each dollar put up by buyers. Under today's friendlier terms, buyers will pay an estimated $9 a share for $3.94 a share in tangible book value a dilution of 56 cents on the dollar.

Even that doesn't sound very good, does it? The truth about IPOs is that unless you're one of the few big-money investors able to flip a new issue fast, they're rarely good bets. But it's also true that the odds are shifting toward buyers.

To see what I mean, check the record (chart). Jay Ritter, a University of Florida finance professor and leading expert on IPOs, recently examined total returns from each year's group of new issues. Looking all the way back to 1973, Ritter calculated three- and five-year returns from each IPO's first closing price. Only in very cold IPO years did the average new issue prove a market-beating investment. Ritter had to go all the way back to the permafrost of the mid-1970s, when new issues numbered fewer than three a month, to find any solid, sustained outperformance. And in 1996, when IPO volume peaked at 636, new issues wound up delivering a pathetic 67% of the broad market's three-year return.

Does this mean you should run out and buy Loudcloud? No, but if you can get the shares for under $9, you would be in good company: Compaq is stepping up to buy a chunk of stock at $8.55 a share. If you've ever hungered for an IPO, now's the time to open the menu.

Questions? Comments? Send an e-mail to barkerportfolio@businessweek.com or fax (321) 728-1711 By Robert Barker


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