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Is the rush to float shares folly?

As investors grow nervous over bellwether tech companies, prospects for secondary stock offerings are diminishing.

As investors grow increasingly nervous over issues facing some of the bellwether technology companies, prospects for floating out shares are rapidly diminishing.

Or at least that's what online music retailer CDnow is thinking, having terminated its proposed secondary stock offering this week in what analysts said might be an indication that opportunities for companies to raise money through stock sales have passed for the moment.

The cancellation also is a sign that confidence in the continued gains of Net stocks is waning.

Some of the companies facing the same dilemma as CDnow include EarthLink Network, which has said that it plans to file for a secondary offering of 3 million shares; Lycos, which has filed for a secondary offering of 3 million shares; Preview Travel, which has filed to sell 3.5 million shares; and CBS SportsLine, which has filed for another stock offering.

The current push to raise additional cash can be attributed to the bullish Internet market, said Matthew Finick, an analyst at NationsBanc Montgomery Securities. He explained that the incentive for floating out shares is especially strong for nascent Net companies, which need to spend a lot on advertising and marketing to attract customers early on. Indeed, Internet companies have made up the overwhelming number of secondary offerings in the technology sector of late.

"The cost of collecting a customer now is much less expensive than it will be a year from now," Finick said.

Another reason Internet companies have been jumping on the offering bandwagon is the unprecedented valuation gains companies in the Net sector have seen recently. Such gains have created a prime opening for companies to gain acceptance on Wall Street, Richard Peterson, an IPO analyst at Securities Data, said in an interview last month.

He said also that companies are trying to time their offerings to take advantage of the success other Net companies have seen.

But with Microsoft going head-to-head with the Justice Department over antitrust allegations, and Intel facing its own legal battle as well as big challenges from slower growth in the personal computer market and downward pressure on prices; combined with continuing economic uncertainty in Asia, some of the big gains that Internet stocks have chalked up are being reversed rapidly, closing the window of opportunity to float out shares.

Because Internet stocks are among the most volatile, when the going gets tough, investors tend to go elsewhere and companies tend to refrain from floating shares unless they are in dire need of cash, Finick said.

Seasonality also is a factor, as the summer season always has been a slow time for IPOs and secondary offerings. Such activity usually picks up again in the fall, when back-to-school and holiday shopping gets underway.

CDnow's stock has fallen more than 50 percent of late, to yesterday's close of 17.75, down from a high of 39 in April. The online music retailer ended its most recent quarter with $60.5 million in cash and cash equivalents.

Christopher Feiss, an analyst at BT Alex Brown, said in a research note today that the company is still well positioned "strategically and financially."

He noted that CDnow is still a market leader by every measure, including sales, customers, and reach, and is the only pure play in its growing market.