Second half outlook: IPO market to perk up

Now that the IPO market has almost recovered from whiplash, analysts see a stronger, leaner fleet of offerings lining up for the second half of the year. Despite a summer lull and choosier investors, the IPO market should rebound in the second half.

The week of June 26 saw 19 offerings debut, the most so far this year, and just short of the record 21 offerings that packed into one week in 1999. And of the 344 companies that have filed to go public this year, only 235 had come to market as of June 27, according to data from Thompson Financial Securities Data. That leaves 109 offerings still in the pipeline.

The second half of the year is usually stronger than the first, judging from the last five years. Every year since 1995, with the exception of 1998, has had more IPOs in the second half. The second half will feature a wireless IPO from Verizon (NYSE: VZ) and Vodafone Airtouch (NYSE: VOD), a spinoff from EMC (NYSE: EMC) and the debut of CMGI's (Nasdaq: CMGI) AltaVista portal.

Will IPOs recover?

Analysts were mixed on whether the recent uptick in companies coming to market signals an end to the IPO lull.

"The overall market is still sketchy -- I don't know if the (recent rally) speaks to a larger trend," said Kenan Pollack of IPO Central.

Even though several companies withdrew their offerings during the market downturn in April and May, the number of companies filing to go public has remained strong. Data on new registrations for April and May showed a total of 164 companies filing to go public; that's an increase over the 143 companies that filed to go public during the same two months of 1999, according to Thompson Financial Securities Data.

David Menlow, head of IPOfinancial.com, attributed part of the volume increase to the fact that many companies postponed going public during the market lull a few months earlier.

But until the overall market recovers, IPOs aren't likely to pick up the pace, analysts agree. With so many bigger names still trading at a discount, investors are being drawn away from the IPO market, Pollack said.

"Investors are still looking for that critical harbinger deal," Pollack added. Though there have been a lot of quality offerings, such as Handspring (Nasdaq: HAND) and China Unicom (NYSE: CHU), lately, they're from very selective categories, Pollack said.

AltaVista (proposed ticker: ALTA) may be what the market's waiting for. The offering was one of this year's most anticipated, but CMGI (Nasdaq: CMGI), its majority owner, called off the deal, saying it awaits better market conditions.

The summer lull

Though the IPO market is shaping up, it will see a setback with the inevitable summer lull before it makes a full recovery.

Over the past 10 years, companies have been much more likely to withdraw their offerings during the summer months, said Paul Juhasz of Thomson Financial Securities Data. He estimated that the number of withdrawn offerings doubles over June, July and August.

The aftermarket performance of summertime IPOs is also noticeably worse. The average aftermarket performance of IPOs one day after their offer date was about half as much as the yearly average in June of 1999 and 1998.

While the fourth quarter is usually the strongest time for IPOs, "a recovery could come at any time over the next three months," predicted Menlow.

Categories to watch

Categories such as wireless and broadband are expected to remain strong, and the hunger for overseas offerings will continue, analysts said. But the markets will have even less tolerance for Internet deals, and the business-to-business sector will continue to drop off.

And there’s no consensus on whether techs as a whole will continue to outpace non-tech offerings.

"Pure content, e-commerce and dot-coms -- the market won't even look at them anymore," said IPO Central’s Pollack. It’s the plumbing deals like StorageNetworks (Nasdaq: STOR) and fiber optic companies that will attract more attention, he said.

Pollack sees more likelihood of non-technology offerings coming to the fore. "Even as recent as 1997, most IPOs were non-tech. People have a love-hate relationship with the Nasdaq now." He offered Krispy Kreme's (Nasdaq: KREM) strong debut as evidence that deals like the proposed spinoff of Sara Lee's (NYSE: SLE) holdings could be hot.

But IPOfinancial.com’s Menlow says techs will continue to rule. "Investors are spoiled -- they're looking for the promise of 30, 40, 50 point gains on the first trading day. Why not buy XYZ fiber optic company instead of Nabisco?"

It's hard to tell what strong offerings are in the pipes, since most companies have been hesitant to set the terms of their deals, Menlow added. He said WJ Communications (Proposed ticker: WJCI), Asia Global Crossing, Avici Systems (Proposed ticker: AVCI), O2wireless (Proposed ticker: OTWO) and C-quential (Proposed ticker: CQTL) could be promising offerings coming to market in the next few months.

Bigger and better

But while analysts are unsure what categories of offerings will be coming, one thing’s clear -- they’ll be bigger and have a new emphasis on brands and profitability.

"With deals like Verizon (Wireless) on the horizon, the overall float in 2000 could end up being more than that in ྟ," Pollack predicted. Verizon, the wireless joint venture of Bell Atlantic, now trading as Verizon (NYSE: VZ), and Vodafone AirTouch, will be twice the size of AT&T Wireless (NYSE: AWE), which offered 360 million shares in its April debut.

And the spinoff of Mcdata, a subsidiary of EMC (NYSE: EMC), may be one of the hottest deals on deck, partly because of its parent's reputation.

"Investors will be raising the bar -- there are better deals on the horizon," Menlow said.

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