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Tech Industry

April showers wash out IPO market

The red-hot market for initial public offerings has been reduced to a smoldering ember practically overnight, and you don't have to look very hard to see why.

The red-hot market for initial public offerings has been reduced to a smoldering ember practically overnight, and you don't have to look very hard to see why.

Last week, just five of 16 scheduled IPOs actually began public trading. In addition, of the six deals on tap this week, three have been carried over from previous weeks. The reason: The stellar returns that marked the IPO market in 1999 and the first quarter of this year crashed to earth with a thud at the start of the second quarter.

A whopping 67 percent of the 112 tech IPOs to debut in the first quarter were trading below their offer price as of late April, according to data collected by CNET Investor. But just two weeks earlier, at the quarter's end, only 25 percent of this same group were underwater.

Evidence of the implosion in the IPO market is clear when compared with last year's results. In 1999, when an average of one tech IPO was launched every day, just 17 percent of 365 tech IPOs ended the year below their offer price.

Here's a sampling of the carnage based on Friday's closing prices:

• VantageMed, an online healthcare information systems and services provider, is the worst performing IPO in 2000--the stock is down 81 percent from its $12 IPO price.

• VarsityBooks.com, an online college book seller, is down 75 percent from its $10 IPO price.

• Pets.com, an online pet store, is down 74 percent from its $11 IPO price.

• ImproveNet, an online provider of home improvement information and services, is down 73 percent from its $15 IPO price.

• Xcare.net, a healthcare business-to-business e-commerce company, is down 67 percent from its $18 IPO price.

• PartsBase.com, a business-to-business aviation e-commerce company, is down 61 percent from its $13 IPO price.

• ARTISTdirect, an online music company, is down 60 percent from its $12 IPO price.

(For a complete chart of IPO performance in the first quarter, visit CNET Investor.)

"With market conditions so bad, many of these deals are coming down hard," said Jeff Hirschkorn, senior analyst with IPO.com. "Without a doubt, these markets are a way to test the mettle of an underwriter."

Indeed, while investors' portfolios have been hit hard, many underwriters also are finding little to cheer about as many of their once-high flying IPOs rapidly take on water. And they note that the past performance of an underwriter is a crucial ingredient in determining the quality of a deal.

"It's critical to know who the underwriter is. It can't be stated enough," said David Menlow, president of IPO Financial Network. "It's a very critical component on whether an IPO has price appreciation stability."

With that in mind, Merrill Lynch had the highest ratio of IPOs that were recently trading at less than their initial price.

Through April 20, seven of the eight companies that Merrill Lynch took public this year were trading below their offer price. By comparison, just two of its 19 technology IPOs in 1999 ended the year below their offering price.

While young stocks are largely at the mercy of the overall market, which has been extremely turbulent in recent weeks, Merrill Lynch's offerings have been hit particularly hard.

"Merrill Lynch wasn't really in Internet IPOs until they hired analyst Henry Blodget (last year)," said Richard Peterson, an IPO analyst with Thomson Financial/Securities Data. "They did their share of technology deals, but they weren't known for it."

Joe Schell, chairman of global technology investment banking for Merrill Lynch, blamed the firm's first-quarter performance on the public's sudden loss of appetite for business-to-consumer (B2C) stocks.

"We did some B2C deals early in the year like Pets.com and Buy.com. We don't think there is anything wrong with those companies, but the markets have swung against B2C," Schell said. "We don't think the companies' fundamentals have deteriorated, but that the lower stock price reflects market psychology."

Meanwhile, Chase H&Q saw its IPO performance flip-flop after the market turmoil. Through April 20, four out of five of its deals were underwater, compared with the reverse ratio just a couple of weeks earlier.

The recent performance by Chase H&Q, however, is not as bad as it was last year when compared with its peers. Last year, Chase H&Q was the worst performing tech underwriter among banks that handled six or more deals.

Of the 21 tech deals undertaken by the former Hambrecht & Quist firm, six were trading below their offer price at the close of the year.

Morgan Stanley Dean Witter and Salomon Smith Barney have also seen a reversal since last year, when they managed to keep all of their tech deals above water. Morgan took 31 companies public last year and Salomon handled six.

But at the quarter's close, three of Morgan's 14 deals so far this year were down. That number grew to eight as of April 20. Meanwhile, two of Salomon's six IPOs in the first quarter had fallen below their offering price at the end of the three-month period.

Comparing the offering price to the current price is one way to gauge the performance of an underwriter, but Peterson said the closing price on the first day of trading is a better barometer.

"The offer price is fiction to many individual investors. It's only institutional investors, executives or friends and family who can get in at the IPO price," Peterson said. "The first chance an individual investors gets is the first day of trading. It's critical to look at the first-day close and there you'll see a different story."

Of the 10 underwriters who floated out three or more deals in the first quarter, eight out of 10 had all their deals trading below the first-day close as of April 20.

Morgan Stanley and Salomon Smith Barney were the only exceptions. Morgan had two of its 14 deals up from its first day close through last week, while Salomon had two out of its five deals ahead of its first day close.