Private Net Firms Look at Alternatives to IPOs
The suddenly harsh environment for new Internet stock offerings is forcing companies on the brink of selling their first shares to consider alternatives.
Now more young Net companies will seek to sell themselves, or major stakes, to established firms, venture capitalists and investment bankers say.
“This will, in all probability, lead to more private companies being acquired or merging,” said Brad Koenig, co-head of the technology group at Goldman, Sachs & Co. Other capital-needy firms may turn to private financiers.
Some companies are still trying to tap the public market, but with devastating results. Several companies planning initial public offerings have already trimmed the number of shares to be sold or cut the price. Online recruiter Hotjobs.com did both--yet its shares dropped Tuesday from their IPO price of $8 to close at $7.63.
InterWorld, a Net software firm, priced its shares Monday night at $15. But they apparently weren’t distributed--trading never began Tuesday. IPO tracker Securities Data cited a last-minute regulatory review.
Meanwhile, Net florist FTD.com looked at what happened to shares of rival 1-800-Flowers.com--which have fallen from an IPO price of $21 last week to $14.88--and put off its own debut.
Investment bankers say far fewer than the 100 Net-related firms now planning IPOs will make it out of the gate.
IPO hopefuls have three choices, said banker Andy Sessions of Thomas Weisel Partners. “One is to forge ahead and go public, but that’s only going to work for the franchise companies where they are clearly the market leader.
“For some of the others, where the business model may be a little green, they can try to sell themselves to someone or bring in a strategic partner”--an investor like Intel or Microsoft.
Online music distributor MP3.com last month sold 5% of itself to Groupe Arnault of France concurrent with its IPO, which was well-received, though the stock has since tumbled.
Acquisitive companies that are already public are taking advantage of the reduced valuations of fledgling Net firms. For example, Net advertising firm DoubleClick last month agreed to buy rival NetGravity for slightly less than what NetGravity’s stock was trading for at the time.
“DoubleClick was saying, ‘We think they’re going to go down further,’ ” said David Golden, co-director of investment banking at Hambrecht & Quist.
Golden predicted more of the same as many firms lined up to go public begin to lose their nerve.
“These small companies have got to get the money, and often they can partner with someone,” he said.
For leading tech firms such as Compaq and Hewlett-Packard that want to improve their Internet expertise, “the opportunities for low-hanging fruit are going to be pretty big,” Golden said.
For their part, venture capitalists said the IPO shakeout was to be expected and won’t have a dramatic impact on their strategy for funding new Net companies.
“If you pull back just because of the markets, you’re going to miss the opportunity to get the best returns,” said Gary Anderson, managing director of TL Ventures.
TL was a backer of U.S. Interactive, a Net consulting firm that went public at $10 a share Tuesday and edged up to $10.63. The company had hoped to get $12 a share.
Many venture investors say companies that turn back to venture capitalists for money will find a receptive audience.
Silicon Valley is awash in cash, and venture firms are competing aggressively for new projects.
In the most recent quarter, a new survey found, $2.7 billion in venture funding roared into Silicon Valley firms, $1 billion more than in this year’s first quarter--and that quarter had set a record.
“There’s still plenty of cash out there, and you’ve got to put it somewhere,” said James Atwell, author of the study and head of the venture practice at PricewaterhouseCoopers. He said 97% of firms that got a round of funding could get another if needed.
The Internet “is still just in its infancy,” Atwell said. “There are still a lot of great ideas.”
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Stocks: How Bad?
With another decline on Wall Street on Tuesday, many key market indexes are down 9% or more from their 1999 peaks--and Internet stocks have suffered worst of all. A sampling of indexes:
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% change from: % change from: Index ’99 high Jan. 1 Dow industrials -4.9% +16.1% S&P; small-cap -7.7 -1.1 S&P; mid-cap -9.0 -0.8 NYSE compos. -9.0 +1.3 S&P; 500 -9.7 +4.3 Nasdaq compos. -13.1 +1.3 Dow transports -17.1 -0.4 Internet index* -29.1 +18.9
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*Interactive Week index
Source: Bloomberg News, Times research
