For IPOs, the Big Sleep May Be Over


By Amey Stone It is a little early to call it a rebound, but the long-dormant market for initial public offerings is showing signs of waking up. "It feels like the very early throes of a gradual reopening," says Dixon Doll, managing general partner at venture-capital firm DCM Doll Capital Management.

"You need to think of the IPO market as a sieve," advises Don Luskin, chief executive of MetaMarkets.com, which runs an IPO fund. In 2000, that sieve was so porous that "rocks, twigs, and junk," could get through, he says. "Now, only the purest gold" makes it. That probably overstates it a bit, but analysts say there is a backlog of high-quality deals that will probably get done in the next few months, while lesser-quality IPOs continue to wait in the wings. Says Doll: "I don't see the floodgates opening."

OLD ECONOMY TASTE? In mid-May, several new companies were brought to market at decent prices. Money-losing optical-switch maker Tellium TELM

priced on May 16 at $15 a share -- the higher end of the range -- raising $135 million on the sale of 9 million shares. It closed at $21 on its first day of trading, a respectable 40% pop.

"Our timing was impeccable," says a cheery Mike Orsak, general partner at Worldview Technology Partners, a first-round investor in the company. "Tellium is a good deal, and it will open the window for other high-quality companies."

Trends are emerging in the new-issue market. The success of Reuter's Instinet Group INET

spin-off, which priced 32 million shares at $14.50 a share on May 17, is likely to encourage more electronic-trading firms to go public, says Kyle Huske, market analyst at IPO.com. And Global Power Equipment Group GEG

, which priced at 7.35 million shares at $20 a share, also on May 17, is only the latest offering in a spate of successful energy IPOs. Reliant Resources RRI

, the biggest energy issue, raised more than $1.5 billion in its IPO on April 30. I it trades at around $35 pershare, up from an initial $30.

Other Old Economy names will be served up soon. Kraft Foods is expected to price in mid-June, and Prudential Finance and Accenture (formerly Andersen Consulting) are due out later in 2001. "A lot of little bits of good news is adding up to improved sentiment," Huske says.

BURNED BY TECH. The quality of the recent deals is in stark contrast to the dozens of young money-losing companies that underwriters pushed out the IPO door in late 1999 and early 2000 before the Nasdaq crashed and the IPO market abruptly dried up. "The cracks in the IPO market started last May. As the Nasdaq continued its slide, the market entered a nuclear winter," says Tom Taulli, author of Investing in IPOs. "The first quarter of 2001 was one of the worst times in IPO history in terms of number of deals." From Jan. 1, 2000, through mid-May, 2000, there were 188 deals in which $51.5 billion was raised; in the same period this year, 25 deals have raised $10.5 billion, according to IPO.com data.

Of course, back in those heady days before the Nasdaq meltdown,

nothing seemed to stop shares from soaring on opening day, often only to begin a long, painful descent that burned many individual investors. Sycamore Networks SCMR

is a classic example. It priced in October 21, 1999, at $38 a share, opened for trading the next morning at $271, and closed that day at $185. Buffeted by competition and weak demand for its optical equipment, it now changes hands at around $10 a share.

The IPO market's perking up this year is good news for investors, since it provides more evidence that overall market conditions are improving. Aided by the Federal Reserve's latest round of interest-rate cuts, investors are more optimistic that the economy will pick up in the second half of 2001. "It's just an inkling of activity," says Taulli, "But to people involved in this area, it is earthshaking."

OPPORTUNITY FOR SMALL INVESTORS? But for the IPO market to really come back -- to the point where dozens of deals get done each week instead of three or four -- tech stocks will have to rebound, says former Apple Coomputer CEO Gil Amelio, now at Sienna Ventures, an early-stage technology investment partnership. After the tech sector recovers, it will take another quarter or two for IPOs to come back full force.

While venture capitalists aren't licking their chops yet, this very early upswing makes for probably the best time in the IPO market cycle for small investors to take a stab at buying a newly public company. That's because only the best companies are making it out the IPO door. Tellium was brought out because it boasts a $1 billion backlog of guaranteed contracts, giving it the precious and rare quality in techdom: visibility on future sales.

Another plus for small investors: Because there is less investor interest in IPOs in general, the newly public companies are not rocketing on their first day of trading the way they did in 2000. So far this year, according to IPO.com, IPOs have jumped an average of 12% on their first day of trading -- although May's crop has leaped 33%, on average. This compares to the same period in 2000, when IPOs jumped an average of 78% the first trading day. And while that may not be great news for institutional investors who buy IPOs in order to juice their portfolios, it means small investors get a better price buying an IPO in the secondary market. "Individual investors never got that one-day pop anyway," says Luskin.

"FASHIONABLE AGAIN." And the tepid interest could mean that more small investors have a shot at getting in at the offering price. Many online brokerages, such as Charles Schwab or E*Trade have systems in place to allocate some IPO shares to their customers. "It's still difficult, but it is worth a try," says Taulli. He also notes that securities regulators are investigating how IPOs are allocated, which will probably lead to Wall Street making the process fairer as a "preemptive strike" against any regulatory action.

Of the recent deals, Luskin says he thinks Riverstone Networks RSTN

and Tellium are attractive buys. He is also a fan of Mirant MIR

, which both trades and produces energy. Taulli says he thinks Instinet is an attractive long-term play.

Although prices are more reasonable and companies coming public are higher quality, most of this year's IPOs aren't high-growth companies. "Many of these are just spin-offs of existing companies," says Luskin. He cites Kraft and the upcoming offering of coal company P&L Coal Holdings, which was owned in a Lehman Brothers private-equity fund, as two examples. They are only being spun off now because their sector is hot, says Luskin, likening these business segments to "old clothes that have become fashionable again."

And, despite Luskin's "gold nuggets" analogy, the IPO market is still a risky place to play. Lucent's optical components spin-off, Agere Systems AGR

, barely made it out of the gate in late March for $6 a share and is only at $7.50 a share now. KMPG Consulting KCIN

came public in February at $18 and now trades at $17. But for investors who got burned trying to get in on a dot-com IPO in 1999 or early 2000, this new crop of initial offerings with real business plans and longer operating histories offers far better pickings. Stone is an associate editor of BusinessWeek Online and covers the markets in our daily Street Wise column.

Questions or comments? Join in the discussion at our Ask Amey Stone interactive forum


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