The Year’s IPO Recruits Are Facing a Tough Initiation
Gone are the days of the 600% IPO pop--at least for now.
Nasdaq’s troubles and the rise of savvier investors no longer willing to buy new stock of anything “dot-com” have led to the dismal performance of initial public offerings this year.
Some of the year’s best-performing deals are up only 10% or less from the closing price on the first trading day (a more realistic measuring point than the offer price, which is inaccessible to many individual investors).
The 149 IPOs sold this year have dropped an average of 45.3% from the first-day close to Friday’s closing price, according to CommScan, a New York-based investment banking research firm. More than half are trading below even their offer price.
Price declines of California IPOs have been even sharper, with the stocks down 51.1% on average from the first-day close.
“Individuals are not willing to take [just] anything that comes along anymore,” said David Menlow, president of IPO Financial Network in New Jersey. “It’s shaking out a lot of the loose timber. I think we are going to see a lot of carcasses littering the IPO landscape in the next few months.”
For the year, the worst-performing IPO is Santa Clara, Calif.-based Neoforma.com, down 85.6%. Other duds include Seattle-based Onvia.com, down 85.4%.
The biggest gainer so far is Beaverton, Ore.-based Corillian Corp., which has risen 35% since its first-day close Wednesday. Insurance giant MetLife Inc., with a slim gain, is also among the leaders.
“I don’t think investors buy IPOs. Speculators buy IPOs, and they are moving out because they are not guaranteed the big pops, the 400% increases they saw months ago,” said Gail Bronson, a Silicon Valley investor and analyst with IPO Monitor, a Calabasas-based data firm. “These people are moving away from the gambling table.”
Last week’s 25% plunge in the Nasdaq composite index punished new issues and prompted more than 10 companies to abandon IPO plans, according to CommScan. In fact, 29 equity deals, including secondary and convertible offerings, with a total value of $3.5 billion were pulled last week, according to CommScan.
The shelved IPOs included San Francisco-based Rigel Pharmaceuticals Inc. and San Diego-based Signal Pharmaceuticals Inc., as drug and biotech stocks have been among the hardest hit.
But companies in other sectors also postponed deals, including Englewood, Colo.-based Crown Media Holdings Inc., a cable television unit of Hallmark Cards Inc., which had expected to raise as much as $260 million through manager Donaldson, Lufkin & Jenrette.
“Nothing but the highest-quality deals are going to be able to come public in the next month or so,” said Andrew Cupps, manager of the $900-million Strong Enterprise mutual fund, which specializes in growth stocks. “It’s something that had to happen.”
About 20 IPOs are still planned for this week, though it is unclear how many of them will be sold, analysts said.
Besides hurting companies and investors, the IPO slowdown is expected to crimp profits for U.S. investment banks, given the lucrative fees the deals generate. It also has sent a shiver through the offices of venture capital firms, which count on juicy IPOs or acquisitions to get returns on their investments in start-up companies.
Investment banks had scheduled 108 IPOs worth $12.7 billion in April, indicating potential fees of as much as $889 million, given the 7% average fee banks make on each deal. Banks have reduced this month’s IPO calendar to about 95 deals, according to CommScan. Goldman Sachs Group Inc. and Morgan Stanley Dean Witter & Co., which underwrote almost half the record $22.6 billion in new sales in the first quarter, were among firms counting on a continuing IPO boom.
IPOs are rarely a cakewalk, of course.
“You worry about every one of your deals, even in a good market,” said Todd Jadwin, a managing director at Banc of America Securities in downtown Los Angeles. “This is not the first time we’ve seen periods like this.”
In the autumn of 1998, because of market volatility in August and September, more than three weeks passed without any first-time stock sales, the longest drought since 1975, according to Thomson Financial Securities Data. But the market quickly recovered, and 1999 was a banner year for IPOs, with many companies notching gargantuan gains.
Venture capitalists such as Hank Barry, a partner at San Francisco-based Hummer Winblad Venture Partners, said they were closely watching the market, yet trying to keep a long-term perspective.
Like others, Barry was encouraged by Thursday’s successful IPO by Menlo Park, Calif.-based Nuance Communications Inc., which was priced at $17 a share by Goldman Sachs and nearly doubled in its Nasdaq debut.
“Nuance means the IPO window is not shut,” said Barry, who follows the market on TV and through a pager service. “It’s almost closed, but there is a 3-inch gap, and if you are really fit, you can get through.”
The Nuance deal was a sign from Wall Street that it will welcome IPOs from business in certain sectors, such as wireless communications or Internet infrastructure, analysts said. Nuance plans to roll out a voice browser in the second half.
But companies in less-favored sectors such as business-to-consumer e-commerce are still likely to find the going rough.
Companies hoping to go public by the end of the year are scrambling to retool their business plans to make themselves look trendy to Wall Street types, according to investment bankers and venture capitalists.
One said jokingly that the best type of business to be at this moment is a “wireless Chinese infrastructure play.”
Times wire services were used in compiling this report. Remember that initial public offerings are highly speculative and not suitable for all investors. Debora Vrana, who covers investment banking and the securities industry for The Times, can be reached at debora.vrana@latimes.com or at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
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IPO Woes
So far this year, buying IPOs has been dangerous to an investor’s financial health. The 149 initial public offerings are down on average 45.3% from their closing price on the first trading day. IPOs by California-based companies have fared even worse, declining 51.1%. Here are the top and bottom performers in the U.S. and Canada this year:
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Ticker Pct. IPO Company symbol City down date Worst-Performing IPOs Neoforma NEOF Santa Clara, Calif. -85.6% 1/24 Onvia ONVI Seattle -85.4 2/29 Versata VATA Oakland -83.8 3/2 Witness Sys. WITS Alpharetta, Ga. -83.6 2/9 Antigenics AGEN New York -82.4 2/3 Best Performers Corillian CORI Beaverton, Ore. +35.3% 4/12 Cabot Micro CCMP Aurora, Ill. +20.6 4/4 Sun Life SLC Toronto +15.2 3/22 T/R Systems TRSI Norcross, Ga. +10.9 1/25 MetLife MET New York +2.5 4/4
1st-day Friday Company close close Worst-Performing IPOs Neoforma $48.50 $7.00 Onvia 61.50 9.00 Versata 92.75 15.00 Witness Sys. 40.06 6.56 Antigenics 61.38 10.81 Best Performers Corillian $8.50 $11.50 Cabot Micro 24.88 30.00 Sun Life 9.38 10.81 T/R Systems 15.44 17.13 MetLife 15.50 15.88
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Sources: CommScan, Bloomberg News
