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The law of IPO supply and demand

As e-commerce wannabes, Internet service provider start-ups, and on-line journals jockey for investors' attention, the flood of offerings may overwhelm the market.

Even Internet IPOs finds themselves accountable to the laws of supply and demand. As e-commerce wannabes, Internet service provider start-ups, and on-line journals jockey for investors' attention, the flood of new equity offerings may overwhelm the market and leave some issues overlooked.

Specifically, 26 Net-related initial public offerings registered to go public in March, while another 22 companies announced plans in April. Half of the 22 IPOs filings to date in May are Net-related. Over the past 10 weeks, the market has seen on average one new Internet IPO per day. In contrast, more than 70 Internet-related offerings went public since the beginning of 1998.

This flood of Net offerings is already affecting the aftermarket performance of many Internet IPOs.

According to statistics accumulated by Thomson Financial Securities Data, the average gain of Internet IPOs priced since September 1998 through May 4 was greater than 233 percent. However, more than half of those gains was generated by the close of the first trading day. Furthermore, in the absence of the two best-performing Internet IPOs priced in the past seven months--eBay and Priceline.com--the overall gain for all recently-completed Internet IPOs drops by nearly one-third to under 164 percent.

However, once pricing data is examined after an issue's first trading day, a typical Internet IPO (excluding eBay and Priceline.com) has on average underperformed the Dow Jones Industrial Average, when similar periods are compared.

Specifically, from late September through the present day, the Dow has moved approximately 38 percent from the 8,000 mark to hover around 11,000. In comparison, from an issue's second day of trading through May 4, a typical Internet IPO (again, excluding eBay and Priceline.com) could muster only a 34-percent gain on average.

Period* Net IPOs Net IPOs** Non-Net IPOs
1 day after offer date 134.9% 129.8% 23.8%
1 week after 130.0 124.0 28.2
90 days after 328.6 226.4 37.1
Sept. 28 through May 4 233.1 163.7 27.4
From second trading day through May 4 98.2 33.9 3.6
*Deals priced from September 28, 1998 through May 4, 1999; excludes closed-end investment funds.
**Figures exclude eBay and Priceline.com
Source: Thompson Securities Financial Data

Nonetheless, Internet IPO performance figures, whether including or excluding the group's leading performers, substantially outperform non-Internet IPOs. For example, non-Internet IPOs priced since the end of last September have posted, on average, a first day gain of 23.8 percent and an overall gain of about 27.4 percent. Yet from the second day of trading, a recently completed non-Internet IPO has provided investors a gain of just under 4 percent.

Where previously some companies were the only publicly traded Net firms offering widgets and gadgets, competition in the Net arena has finally arrived. Investors now must compare many similar Internet offerings to determine which will bring the best value. How will investors view firms such as Cheap Tickets vs. Travelscape? Does the TheStreet.com provide better market coverage than CBS Marketwatch.com? Or, can barnesandnoble.com see profitability before Amazon.com?

Paraphrasing the economist Joseph Schumpeter who cited the "destructiveness" of capitalism, the arrival of the next wave of internet IPOs will likely leave some firms in the dust while others blossom. My guess is that it won't be a pretty picture.