IPO: Indefinitely Put Off?

SAN FRANCISCO (04/17/2000) - The apocalyptic 1,000-plus-point, 25 percent drop in the Nasdaq last week -- the market's largest point and percentage drop ever -- has underwriters and executives of companies that are planning public stock offerings running to exit the pipeline. The general idea is to put the IPO (initial public offering) on hold until calmer times promise a successful opening. But given last week's turmoil, that day might be a long way off.

Of the eight companies that are to price this week, several had already delayed from the week earlier, given the extreme volatility in prices then. With the Nasdaq composite and TheStreet.com's Internet index seesawing up and down today like two kids on a school playground, investors should expect to see further postponements -- and perhaps even some withdrawals of Web-related IPOs.

Already, a high-profile offering from CMGI's AltaVista Co. has been postponed until further notice. Also postponing their offerings were Techies.com, Yupi Internet and Zefer. ISKY chose to withdraw its offering altogether. QS Communications, a German DSL provider, dropped its price range from US$39 - $44 to $23 - $29, leading to a 38 percent reduction in the funds that the company expects to raise.

In markets such as these, investors begin to focus more on corporate fundamentals -- such as financials, brand strength, expected growth rate and service/product marketplace opportunity -- to gauge the longer-term success of a company's stock. Just consider the performance of several issues set to price this week.

PEC Solutions provides "professional technology services that enable government entities to harness the power of Internet and other advanced technologies."

Given the focus placed on streamlining government processes over the past few years by the likes of U.S. Vice President Al Gore and others, the company might be in a position to take advantage of tremendous market opportunity. That opportunity is enhanced by the fact that last year, the company turned a $5.6 million profit from $53.2 million in sales. That's exceptional for a Net company going public. The company may suffer, however, from weak branding in the broader investment marketplace.

Coolsavings.com (set to debut this week), on the other hand, has spent $15 million on a marketing campaign that focuses on its "CEO," a talking, sunglass-wearing piggy bank. Weak financials, though, aren't so charming. In 1999, the company lost nearly $16.9 million on revenues of $12.9 million. Last quarter's ad campaign likely will extend losses even further. The company had 3.8 million registered households as members at the end of 1999, having added 1 million new members (a household may have multiple members) during the quarter, twice as many as the company added in the fourth quarter of 1998. No clarity yet on how the campaign is paying off in terms of member additions this quarter, but these are the issues on which investors will focus in the company's debut.

Another nagging Net issue, segment saturation, will be highlighted by the three e-commerce software companies that are set to price this week - OneSoft (set to price today), Embarcadero Technologies (set to debut April 19.) and Software Technologies (also set for April 19). Judging by their respective Web sites, the companies seem to be close to each other in terms of products and services offered.

That could play to the group's advantage. Not knowing which firm will likely be the longer-term success, investors might play the field, in a Darwinian hedge against missing an e-commerce software opportunity. But the similarities in the group could just as likely cause investors to hold off on the whole sector, considering the diffusion of market opportunities among these and other public and private players in the same space.

In today's markets, however, investors likely will retrench, focusing more on current size, financial strength and easily foreseeable growth (read companies with larger capitalizations and stronger balance sheets and income statements) at the expense of relatively riskier investments in new companies. That could spell lean times for many Net IPOs this week and possibly during the coming months.

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