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Tech Industry

Where have all the IPOs gone?

On paper, it would seem that the IPO market is in full swing. Yet, in terms of information technology IPOs, underwriting activity has been in the doldrums.

On paper, it would seem that the IPO market is in full swing. Proceeds in April exceeded $4 billion--the best monthly total since last November. Heller Financial's $814 million debut offering marked the largest deal of 1998 and the biggest IPO, in terms of domestic proceeds, since France Telecom's $836 million issuance last October. The company's after-market performance has been smashing.

Gains in issues such as Verisign, ACSYS, and Cybershop have propelled average IPO returns this year, as measured from their offer dates to present, to better than 25 percent--nearly double the performance of the S&P 500. In fact, no less than 13 IPOs this year have doubled in value from their initial offering prices.

Yet, in terms of information technology IPOs, underwriting activity has been in the doldrums. With 39 deals completed so far this year, the IT sector represents nearly one-quarter of all deals brought to market in 1998. However, by this time last year, 52 IT IPOs had been issued. With no less than 171 IPOs completed during the first four months of 1997, the IT sector stood for more than 30 percent of all IPOs. In fact, as indicated in the chart below, the number of IT IPOs at this point in the year is at its lowest level since 1993:

Volume of IT IPOs for selected periods
Dates Deals Amount
1/1/90 - 5/1/90 12 299
1/1/91 - 5/1/91 12 764
1/1/92 - 5/1/92 31 1,567
1/1/93 - 5/1/93 42 1,604
1/1/94 - 5/1/94 50 2,420
1/1/95 - 5/1/95 45 1,427
1/1/96 - 5/1/96 90 6,615
1/1/97 - 5/1/97 52 1,412
1/1/98 - 5/1/98 39 2,110
*All figures in millions

The forward calendar is hardly explosive, either, as just 21 IT IPOs are expected to be priced within the upcoming two months, from nearly 100 anticipated deals. Additionally, with respect to the upcoming batch of IT IPOs, many top-tier investment banks seem content to stay on the sidelines. Though Salomon Smith Barney leads the way, with four deals in the wings, and BancAmerica Robertson Stephens has a couple of IT IPOs forthcoming, many bulge-bracket firms, such as Merrill Lynch, Goldman Sachs, and Lehman Brothers, each have but a single IT IPO on their respective calendars.

Moreover, banks such as Commonwealth Associates, Whale Securities, and, making its first appearance as a book manager for an IPO, Hoak, Breedlove & Wesneski, are finding their way up the IT IPO underwriting charts. While total domestic proceeds raised so far in 1998 stand at about 50 percent of the previous year's level at this point in the year, overall volume is substantially below the more than $6.6 billion raised by this point in the year two years ago.

Finally, in terms of performance, it's been a market of haves and have nots. Sure, some issues are white hot. Yet, for every Visual Networks, which surged over 180 percent, from an offer price of $14 a share to $40 a share, there are issues like Command Systems, which has dropped some 42 percent from its offering price of $12 a share, or like Merge Technologies, which has slid 29 percent since it went public at $6.

Though the typical IT IPO has surged some 42 percent so far this year, one must ponder whether the ride is more a function of tailgating rather than trailblazing. Given the explosive gains this year by Yahoo, Amazon.com, and MindSpring, some issues are likely being fueled by the promise of similar gains, rather than by actual performance. Should some of this year's crop of deals fail to deliver results, the payoff may be a conspicuous nose-dive rather than a big fat wallet.

In the fateful words from the television series Hill Street Blues, "Be careful out there!"

Richard Peterson writes regularly about high-tech IPOs in Marketwise.