THE DAY AHEAD: IPO flop-o-meter runs amok

Larry Dignan

Jan. 2, 2002 4:43 p.m. PT

4 min read

The prospects for initial public offerings are murky at best, but that hasn't stopped a host of tech companies from diving into the market and drowning quickly.

Investors are snubbing their noses at questionable companies just days (sometimes minutes) after they start trading. In addition, there's too much stock on the market -- IPOs, secondary offerings and the expiration of lock-up periods are flooding the market.

Enough already.

IPOs: Too much of a bad thing?

Recent IPO flops include job hunting site Opus360 (Nasdaq: OPUS), which looked promising for about a day, but closed Tuesday at 8 1/2, compared with Friday's offering price of $10. Healthstream (Nasdaq: HSTM) was broken on its first day of trading Tuesday.

And Corillian (Nasdaq: CORI, profile) is poised to flop today. The company, which makes financial services software, priced 4 million shares at $8 each. The price range was $10 to $12. Corillian, wake up. The market is trying to tell you politely it doesn't want your shares.

In fact, broken IPOs -- offerings that fall below their initial price on the first day of trading -- are common these days. More than one-third of the IPOs launched in the last month trade below the initial price.

Will these young companies, investment bankers and venture capitalists ever learn? Nope. The companies may need the IPO cash to keep going. And venture capitalists and investment bankers are only looking to make a buck, at the expense of the individual investor.

Since questionable companies are flooding the market, we started the flop-o-meter, a gauge (guess?) of which IPOs will fail miserably.

MEGAFLOPS

In addition to the Corillian IPO mentioned above, FloNetwork (Nasdaq: FNWK, profile) and Coolsavings.com (Nasdaq: CSAV, profile) are shaky. Just what the world needs -- two more Internet direct marketing firms. FloNetwork, brought to you by lead underwriter SG Cowen, is hoping to price 3.8 million shares between $10 and $12. Coolsavings.com is hoping to sell 4.2 million shares between $11 and $13.

FloNetwork and Coolsavings.com are similar to each other -- and a dozen already public companies. For 1999, Coolsavings lost $17 million on sales of $12.9 million. FloNetworks' financials were much weaker. For the five months ending Dec. 31, the company lost $2.4 million on sales of $1.2 million.

But the real indicator that this duo will flop can be found in the competition part of the regulatory filings. Coolsavings cites FreeShop (Nasdaq: FSHP), LifeMinders (Nasdaq: LFMN), YesMail (Nasdaq: YESM), Cybergold (Nasdaq: CGLD), MyPoints (Nasdaq: MYPT), Netcentives (Nasdaq: NCNT) and others as competitors. FloNetworks cites the same crowd and names a few more competitors, including Kana Communications (Nasdaq: KANA), eGain (Nasdaq: EGAN), Mail.com (Nasdaq: MAIL) and Critical Path (Nasdaq: CPTH).

The companies said the market is intensely competitive with few barriers to entry. Folks, they are not kidding.

Coolsavings and FloNetworks, scheduled to trade Thursday or Friday, are obvious flop-o-meter candidates, but the other IPOs this week are a bit harder to call.

COOL RECEPTION

Nuance Communications (Nasdaq: NUAN, profile) is next on our flop-o-meter rankings. The company's software develops, makes and markets a voice interface software platform. The company hopes to price 4.5 million shares between $14 and $16.

Nuance may have had a better debut if Lernout and Hauspie (Nasdaq: LHSP) didn't recently buy Dragon Systems to lock up a big chunk of the market. Other competitors include IBM (NYSE: IBM), Lucent (NYSE: LU) and Microsoft (Nasdaq: MSFT).

For 1999, Nuance lost $18.5 million on sales of $19.5 million.

REAL BUSINESSES, REAL BORING

Camtek (Nasdaq: CAMT, profile)

, which makes testing equipment for circuit boards, is pricing 2.8 million shares between $16 and $18.
According to analysts, Camtek is similar to Nova Measuring Instruments (Nasdaq: NVMI). Both have real revenue and an established business.
The problem? Nova's market debut Tuesday was decent, but hardly soared. Nova priced at 18 and closed at 22 15/16. Look for Camtek to about do the same.
PEC Solutions (Nasdaq: PECS, profile) is looking to price 7 million shares between $12 and $14. We're rooting for this IPO, but it's dicey because the company's business is boring and it competes in the bloated services sector.
If this company flops, it'll be a case of "decent company, bad market." PEC provides "eGovernment services." Simply put, it migrates government systems from legacy systems to Internet-based systems.
The first thing that stands out about PEC is the profits. For 1999, PEC reported a profit of $5.6 million on sales of $53 million. Not too shabby. The big wild card is competition. PEC competes with a host of e-services companies and battles Unisys (NYSE: UIS), Computer Sciences Corp. (NYSE: CSC) and Electronic Data Systems (NYSE: EDS).