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Initial Public Momentum?


Throughout Silicon Valley, all eyes are on Google Inc. and its chief executive, Eric Schmidt. The privately held technology highflier is expected to launch an initial public offering early next year. With the market for tech IPOs starting to heat up, cubicle dwellers everywhere are excitedly speculating that the Google offering, as well as one from Salesforce.com Inc., could provide the spark needed to really rekindle the market.

That would mark a major turnaround. After soaring in the late '90s -- more than 2,300 companies went public from 1996 to 1999 -- initial public offerings virtually dried up when the technology sector and the broader stock market collapsed. Fewer than 100 companies went public in each of the past two years, while just 10 companies came out in the first six months of 2003 -- the lowest half-year total since the mid-'70s.

Now, however, the appetite for IPOs is returning among investors and upstart companies alike. With the economy picking up and the stock market rallying, 38 companies went public from July through October. An additional 35 have registered to go public in the next few months. And with plenty of others scoping out potential underwriters, investment bank Thomas Weisel Partners expects 150 to 200 tech and non-tech companies to go public next year. Says Blake Jorgensen, director of investment banking at Thomas Weisel: "We're starting to see a pipeline develop."

So far, performance has been mixed. Overall, the few dozen companies that have gone public this year have averaged a 32% return on investment -- well below the 45% climb the NASDAQ index has posted. In part, that's because several recent biotech IPOs have failed to live up to expectations and are now trading below their offer prices. And others, such as money-losing e-tailer RedEnvelope (REDE) Inc., have barely held their own. Shares in the online gift site, which went public on Sept. 25 at $14 a share, closed on Nov. 5 at $13.89.

BACK TO BASICS

Some newly listed companies are going gangbusters, however. The best technology performer, semiconductor outfit FormFactor Inc. (FORM), is up 91% since going public in June, thanks to a hot market for the flash-memory chips it makes. Meanwhile, shares in Digital Theatre Systems (DTSI) Inc., a provider of digital entertainment products and services, have jumped 84% since its July offering.

As the IPO market warms up, the emerging rules of engagement look markedly different from the frothy boom years. For starters, companies need to prove their financial chops before taking the plunge. According to Thomas Weisel, the tech companies that have gone public this year have averaged about $40 million in quarterly revenues. Moreover, prior to going public, on average, they project 27% annual revenue growth.

That's one reason Sequence Design Inc., a promising chip-design software company in Santa Clara, Calif., is holding off for now. Chief Executive Vic Kulkarni doesn't expect to become profitable until May, so he's aiming for a late 2004 offering. "You go sailing only if there's wind behind you," he says.

In addition, there's a whole new definition for a "successful" IPO. During the bubble, companies often defined success by the size of their first-day pop, and the ensuing marketing buzz it earned. Indeed, in 1999, the average first-day return on IPOs was 71%. Trouble is, companies were leaving billions of dollars on the table that could have gone into corporate coffers.

Now, say bankers, investors, and private firms, the focus is on the basics: getting the needed capital at the best possible price for the company. And most companies today frown on the 1990s practice of doling out "friends and family" stock to pals, associates, and customers. That makes for less incentive to lowball a company's asking price. All told, first-day pops now average 12%.

The more sober environment is bringing long-term institutional investors back to the table -- the kind who often hold equity stakes for several years rather than look for short-term trading profits. "You actually have time to do your work, meet with management, and accumulate a substantial position in a company," says Allison Thacker, a portfolio manager with RS Investments.

Where will the IPO market go from here? Analysts say tech will continue to provide most of the opportunities -- and that Internet companies are winning renewed favor. Even a handful of profitable e-tailers, among them BizRate.com and Shopping.com Inc., are considering listing. The IPO market has come back from the dead -- but for now, it's walking, not running. By Ben Elgin, with Robert D. Hof, in San Mateo, Calif., and Emily Thornton in New York


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