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IPO market heads south for the spring

In the second quarter there was only one type of initial public offering investors were interested in, according to analysts: "P2P," or companies with quick paths to profitability.

    Forget business-to-business (B2B), business-to-consumer (B2C) and even business-to-government (B2G)--in the second quarter there was only one type of initial public offering investors were interested in.

    IPO winners and losers
    The ten best and worst initial public offerings of the second quarter, as measured by their first-day change in price.
    Company IPO date % change
    Ten best
    Marvell Technologies 6/26 +278
    StorageNetworks 6/29 +234
    ONI Systems 5/31 +230
    Accelerated Networks 6/22 +219
    Capstone Turbine 6/28 +200
    New Focus 5/17 +155
    Numerical Technologies 4/6 +154
    Saba Software 4/6 +120
    Sonus Networks 5/24 +120
    Nuance Communications 4/12 +100
    Oratec Interventions 4/4 +83
    Ten worst
    eChapman.com 6/15 -39
    Nogatech 5/17 -22
    AsiaContent.com 4/11 -21
    Coolsavings.com 5/18 -21
    DDI Corp. 4/10 -20
    Accord Networks 6/28 -19
    CareScience 6/29 -17
    Lexicon Genetics 4/6 -15
    Genuity 6/27 -14
    Integrated Circuit Systems 5/22 -8
    Source: CommScan
    "Now the buzzword is 'P2P,'" said Richard Peterson, an analyst with Thomson Financial Securities Data. "Companies that have a quick path to profitability."

    In the second quarter ended June 30, IPO investors lost their tolerance for dot-coms that had balance sheets that looked more like those of dot-orgs, as in nonprofits.

    As a result, the IPO spigot that had been wide open for much of 1999 and early 2000 was closed to a trickle.

    In the second quarter, 116 IPOs were launched, 37 percent fewer than in the first quarter. Ninety-eight companies withdrew or postponed offerings, compared with 20 in the first quarter, and 44 companies lowered the price of their shares in response to low investor demand, compared with 15 in the first quarter, according to market research firm CommScan.

    Investors who regularly buy into IPOs admit that the days of investing in unprofitable companies with no clear indication of when profitability will arrive are over.

    "I admit it, just like everybody else, we were playing because the market allowed us to make easy money," said Paul Meeks, senior portfolio manager for Merrill Lynch. "I think every company will have to show a clear path to profitability in 12 to 18 months maximum, rather than the old Amazon method of, 'Yes, we might be profitable, but we don't know when.'"

    Among the companies that did manage to sell shares to the public, Net infrastructure and optical networking companies were the most successful.

    Marvell Technologies, a maker of integrated circuits for data storage and communications, gained the most of any IPO in the quarter, with a 278 percent gain in first-day trading. StorageNetworks, a data storage company, followed close behind with a 234 percent gain in first-day trading. ONI Systems, an optical network equipment maker, ranked third with a 230 percent gain in first-day trading. see story: Cashing in on fiber optics

    Conversely, Internet commerce companies made up two of the quarter's three biggest losers. eChapman.com, an online finance company, was the biggest loser, dropping 38 percent in first-day trading. Nogatech, a digital video compression chipmaker, lost the second most, falling 22 percent in first-day trading. AsiaContent, an Asian Internet company, fell 21.3 percent.

    E-commerce and Net content companies can expect to remain out of favor into the next quarter, according to investors.

    Four companies with "dot-com" in their name launched IPOs last quarter, compared with 14 in the first quarter, according to Thomson Financial Securities Data. Coolsavings.com, one of the four to go public, fell 21 percent in first-day trading.

    "We focus on very few dot-coms at all and don't even go to the road shows anymore," Meeks said. "The only thing I'm bullish on in the Internet space is the infrastructure companies and anything optical, be it components or systems."

    Analysts say the third-quarter IPO market is likely to mirror the Nasdaq composite index, as it did in the second quarter, when the Nasdaq dropped 13 percent from March 31 to June 30.