The IPO calendar is barren, save a few biotech offerings. Underwriters are under investigation for kickbacks. And one of the Web's most comprehensive IPO sites has been on the fritz for the past month.
That sums up the market for initial public offerings lately. Is the IPO in danger of extinction? Not quite, but there's another six months of hibernation ahead, according to venture capitalists and analysts. When the slumber ends, the IPO class of 2001 will have realistic expectations, profits and revenue growth.
After gobbling up a record 543 new deals in 1999, the market managed to absorb 449 in 2000. Things were going strong until April 4, when the Nasdaq fell more than 500 points intraday.
The glut of new offerings over the past few years, along with 2000's valuation shakedown have left many IPOs underwater. On average, companies that went public in 2000 have fallen 14.8 percent below their offering prices, compared to average gain of 194 percent in 1999. That depressing performance effectively closed the window on new offerings, according to Thomson Financial Securities Data.
"We had two strong years for IPOs. 2000 could be a period of transition," said Richard Peterson, chief market strategist at Thomson Financial Securities Data.
The IPO market became so dreary that analysts that are paid to watch new issues couldn't bear to watch. "It would be redundant to just keep saying the market is bad.... there's no sense beating that to death," said Randall Roth of why his company, Renaissance Capital, has stopped publishing its IPO commentaries. Roth said Renaissance updated a few parts, but much of the site is neglected.
Technology IPOs are expected to hibernate at least through the first half of 2001, according to industry experts who spoke at "Exploring the IPO Pipeline," Red Herring's round table discussion Dec. 6.
"For now, there is no IPO market," said Tom Meredith, managing director of Dell Ventures. There's a slight possibility that some really good companies will get out in the first half of 2001, but most companies will have to wait until the second half, Meredith added.
Though the market hasn't closed completely, the bar is very high for those that attempt to go.
The new breed
Only deals that are profitable, have strong management, and have already made a name for themselves will make it out the door.
The market is "leaning towards profitability -- but if a company's not making money it's got to show a dramatic reduction in losses year over year, the revenue curve has to be vibrant, and there has to be a definite sizzle," said David Menlow of IPO Financial.
Analysts also said there won't be so much emphasis on the next killer sector.
"Next year there won't be so much pressure to pull the next rabbit out of our bag of tricks," said Pip Coburn, executive director at UBS Warburg. "Themes in ྟ and 2000 are the same ones that will come back -- broadband, optics... on the software side it's questionable," he added. Other categories expected to be strong are bricks and clicks, wireless, and healthcare, which along with other non-tech companies.
The size of deals may also change.
"Big deals haven't done well," observed Peterson. In 2000, the 10 biggest deals accounted for over 40 percent of the value, and 8 out of those 10 are trading below their offering prices, Peterson said. AT&T Wireless (NYSE: AWE) accounted for over a third of the year's proceeds alone, and currently trades below its offering price of $29.50.
"Initially, it will be smaller deals -- larger ones will have to be recognized on an international scale," Menlow said.
And their performance will certainly be more modest. "We're not going to return to the character of last year's deals -- with 30, 40 and 60 and higher point rises," Menlow predicted.
Loudcloud (proposed ticker: LDCL) and Riverstone (proposed ticker: RSTN) are two of next year's most promsing offerings, according to Menlow. Though neither is profitable, both have some big name backing and show promising growth.
Loucloud was founded by luminary Marc Andreessen, who was one of the people behind the 1995 IPO of Netscape. Andreessen is also Chairman and holder of an 18 percent stake in the company. The company manages Internet infrastructure for online-intensive businesses and drummed up nearly $200 million in funding from Benchmark Capital and Morgan Stanley Dean Witter, among others. Its financial history is short; for the six months ended July 31, the company had $1.94 million in revenue, as compared to a huge net loss of $67.53 million.
Riverstone Networks is the subsidiary of Cabletron (NYSE: CS). The telecom infrastructure company makes routers and switches for service providers. Its sales growth was 602 percent year-over year. In the six months ended Sept. 2, net revenue was $36.33 million, also up dramatically from the $5.32 million for the same period in 1999. Net loss was almost flat; for the six months in 2000 loss was $24.29 million, as compared to a loss of $20.47 million in 1999.
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