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Genuity IPO misses big expectations

This week's initial public offering by the company that claims to have delivered the world's first email proves that bigger is not always better.

This week's initial public offering by Genuity proved that bigger is not always better, and raised the ire of at least one institutional investor.

The venerable telecommunications company that played a key role in the development of the Internet raised $1.9 billion Wednesday when it sold 174 million shares at $11 each--an impressive haul, but far less than the $2.3 billion the company hoped to raise.

Genuity's fortunes slid further once the shares reached the public market. They closed today at $9.16, a 17 percent slide that cut its market capitalization by about $2 billion in just two days.

While this was far from the worst IPO performance this year--the title goes to eChapman.com, which fell 39 percent in its first day of trading--some analysts had seen Genuity as promising given its association with telecommunications giant GTE.

The performance is even more surprising given the recent rebound in tech stocks and the IPO market. The Nasdaq composite index has risen more than 20 percent in the past month, and more than 15 companies planned IPOs this week, compared with an average of five per week in May and June, according to market research firm CommScan.

Earlier this week, shares of Marvell Technologies soared 277 percent in first-day trading, while shares of Stratos Lightwave closed up a solid 62 percent, leading some analysts to believe the IPO drought may be ending. Six tech companies began public trading today, with StorageNetworks posting impressive gains.

So what went wrong with Genuity?

Some analysts suspect Genuity's IPO might have been premature. Although there has been something of an upswing in the past few weeks, "the IPO market is still very rough, and it just can't handle an offering of this size," said George Nichols, a new issues analyst with Morningstar.

But GTE and Bell Atlantic had little choice but to send Genuity public this week if they wanted to complete their merger with Verizon. Because of FCC regulations, Bell Atlantic cannot own more than 10 percent of any long-distance service provider in a market where it holds a dominant share.

GTE and Bell Atlantic see story: Verizon who? needed to spin off Genuity before they could legally merge, and time was running out, said Morningstar analyst Michael Hodel. Indeed, the two companies announced today that they have completed the merger, with the new company to be called Verizon--derived from veritas, "connoting certainty and reliability, and 'horizon,' signifying forward-looking and visionary," according to a press release.

"I think investors were starting to get a little angry," Hodel said. "The companies have been trying to merge for two years now. They've been promising to get (the merger) done by the end of the second quarter."

Ambitions too large?
Some traders say lead underwriter Morgan Stanley Dean Witter made the situation worse by pricing the deal too high, especially for a company that has not posted a profit in the past five years. The company lost $210 million in the first quarter of 2000 on revenues of $248 million.

"It was priced expensively for what it is," said Bill Klein, a data communications analyst with Wasserstein Perella.

At least one institutional investor said he felt that Morgan Stanley misrepresented demand for Genuity shares.

Paul Meeks, a senior portfolio manager at Merrill Lynch who purchased 2 million shares of Genuity, called the deal ?a black eye? for Morgan Stanley.

"I am disappointed in the fact that Morgan Stanely said this deal was over two times oversubscribed up until the final hour," Meeks said. "When you?re told a deal is oversubscribed and it goes below the offering price, it makes me think there?s some fishy business. That is a real, real rarity."

Morgan Stanley would not comment on the Genuity IPO, citing a mandated "quiet period."

Still, analysts say Tune in to CNET News.com TV's IPO
Forecast Genuity's weak performance is another indicator that the IPO market has not fully recovered. "The observation that the IPO market is on a major upswing is premature," said Morningstar's Nichols.

Burlington, Mass.-based Genuity was founded in 1949. The company's predecessor, BBN, helped design and implement the Arpanet in 1969, considered the precursor to the Internet. In its SEC filing, Genuity takes credit for delivering the world's first email.

While some analysts thought the company's history as an Internet pioneer would make it more attractive to investors, others suspected just the opposite--that the company's maturity would work against it.

"With many companies, you're always trading on the expectations of the future. Because this is a company that has been around, the future can pretty well be determined," said Richard Peterson, an analyst at Thomson Financial Securities Data. "With a newer company, you put all your faith in your forecasts."

Genuity states in its SEC filing it expects to incur significant net losses over the next several years because of planned operating and capital expenditures.

Lack of profitability "wasn't a problem not too long ago, but investors are increasingly discriminating," Nichols said.