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"Conceptual" IPOs challenged

Wired Ventures' failed IPO is part of a wave of "conceptual" high-tech deals that are facing increasing wariness among potential investors.

CNET News staff
3 min read
Wired Ventures' failed initial public offering is part of a wave of "conceptual" high-tech deals that are facing increasing wariness among potential investors despite an overall record pace for technology IPOs this year.

Many of these deals--described by one trader as those that had "no earnings or revenues coming in when they went public"--have gotten some of the most hype in this Year of the IPO. Among them were Yahoo, Excite, Lycos, and CNET: The Computer Network.

"The Wired debacle is like a flea on the elephant," said Richard Peterson, IPO analyst with Securities Data. He noted that Wall Street is still interested in high-tech deals, but with companies that are posting profits.

Analysts say the IPO mania of 1996 has come in three stages, starting with these conceptual deals, which swept the markets at the start of year and lasted through spring. At that time, following the Netscape Communications tremendously successful public offering last fall, it seemed that just about any company that mentioned the word Internet in its prospectus was hot.

But the same Internet IPOs that were the darlings of the first half of the year were hit the hardest during the summer, as investors demanded more solid financial foundations from the offerings.

"The technology market basically has come in three waves," said Mark Sherman, director of software banking for Robertson Stephens. "The second wave happened during June through August, when the market didn't like conceptual deals."

Finally, in late August, technology stocks reemerged as favorites, but only those "meat and potatoes" IPOs that have a foundation to support the offering, he said.

Underlying trends that contributed to these three waves included a flood of cash for technology IPOs by mutual fund managers seeking quick turnarounds on their investments. But as the flow of money into mutual funds slowed during the summer, investors began to ask how Internet companies will finance their operations and generate revenues.

Unsatisfied with answers to those questions, many began putting their money in firms like Peerless Group, a computer software company, and Intelligroup, an information technology consulting firm.

These companies--examples of more traditional firms that were posting operating profits before going public--helped draw interest in technology companies because of their earnings potential, according to David Menlow, president of IPO Financial Network. "They've come back to technology because there is a hint of great earnings that is not evident in other markets," he said.

Menlow said overpricing was one factor that harmed many IPOs. The benchmark for a successful launch is whether a company can maintain an opening price up to 1.5 percent higher than the offering price during the first day of trading.

"The deals are coming out higher priced and open three points above their offering price," he said.

Technology companies racing to the big-buck starting line currently number 266. That outpaces the 235 deals done last year, according to Securities Data.

"It's been a record year in terms of the number of deals and dollar amounts," Peterson said. He added that Wired's failed IPO should not have any effect on the efforts by technology companies to go public.

During the year, at least nine technology IPOs were either postponed or canceled, he added. That's slightly up from the previous year when seven failed to go public.

EarthLink Network is among those that didn't make it. The Internet service provider terminated its IPO plans in July, but today said it has revived its intentions to go public and will file a registration statement with the Securities and Exchange Commission in the next few weeks.

Meanwhile, the flood of technology IPOs is further adding to the base of high-tech companies represented on the Nasdaq market. Technology companies represent 40 percent of the securities traded on the market.

But despite the rise in the number of tech firms and their market value per deal, the effect on the Nasdaq has been nominal, said Stephan Bauchesne, Nasdaq market analyst.

"A lot of these IPOs involve smaller companies, and the Nasdaq is based on the market value of a company and not its stock price," he said. "So a Microsoft, which has a larger market value than a smaller company, will have more affect on our market, even if the stock in the two companies move by the same percentage."