Tech Bust May Lead to Better IPO Deals for Investors

By DEBORA VRANA

Dec. 25, 2000 12 AM PT

TIMES STAFF WRITER

The records set this year in money raised via initial public offerings may be tough to break in 2001. And many investors may be glad for that.

The technology stock boom early this year set the stage for a surge of IPO deals sold to hungry investors. As of last week, companies nationwide had raised a record $80.5 billion through IPOs, surpassing last year’s $68.6 billion.

But the performance of the stocks has been another matter. As the tech boom went bust, many of the new stocks have crumbled.

As of last week the average IPO’s decline from its offering price was 25.8%, according to Thomson Financial/Securities Data. For many investors who couldn’t get the stocks at the offering prices and paid much more after they began trading, the losses are obviously more severe.

“This year was the big shakeout,” said Richard Peterson, market strategist for Thomson Financial and author of an upcoming book, “Inside IPOs” (McGraw-Hill, 2001). “There were two [IPO] losers for every winner. It was a complete reversal of last year’s exuberance.”

If there’s good news amid this market trauma, it’s that investors may have the upper hand when it comes to IPOs in 2001.

There is a backlog of nearly 200 companies that would like to go public in 2001, but burned investors are expected to be much more choosy. That could create a much more favorable market for buyers in terms of the stocks’ valuations and other aspects of the deals.

“Investors are going to get better deals,” said David Menlow, president of IPO Financial.com, a New Jersey data firm. “We’re going to see dramatically reduced risk for investors.”

Investors’ wariness of tech stocks could open the door to more IPOs from “old-economy” companies, which could bring more stability to the market, analysts said.

This year didn’t set a record in the number of deals. With 450 IPOs sold as of Dec. 20, the total was down from 543 in 1999. But the average size of this year’s deals was much larger.

California companies accounted for 135 of this year’s IPOs, compared with 171 last year, and raised $17 billion, compared with $13.4 billion last year.

But as a center of the “dot-com” mania, California also provided some of this year’s biggest IPO losers. Those disasters provided a sobering lesson for investors in the dangers inherent in new stocks.

Among the California IPOs that crashed were San Francisco-based Pets.com, the Internet retailer that went public through respected underwriter Merrill Lynch & Co. in February.

By November, Pets.com had ceased operations. Its stock has lost virtually all of its value.

“I’ve never seen anything fall so fast in all my life,” said Tom Taulli, stock analyst for information company Internet.com.

Other losers among California IPOs included ImproveNet Inc., a Redwood City firm that provides home improvement information, including a contractor matching service, on the Web. It went public March 15 at $16 a share through underwriter Credit Suisse First Boston and has since fallen to less than 50 cents.

The company, which laid off nearly 10% of its work force in July, still has about 260 employees. In the third quarter it reported a loss of $12.9 million, compared with a loss of $17.5 million for the same time last year, on revenue of about $2 million, compared with $580,000 a year earlier.

Another dot-com stock casualty was Snowball.com, a San Francisco-based online media firm that went public March 20 at $11 a share through Goldman, Sachs & Co. It was worth less than 25 cents last week.

Snowball.com aims to be a leading entertainment and information site for Generation I, those 13-to-30-year-olds that grew up using the Internet.

Among the California IPOs that by last week still were well above their offering prices was Embarcadero Technologies, a San Francisco software company that went public April 19 at $10 a share. It was above $40 last week, though off its peak of $66.50.

The profitable 7-year-old company, which makes software products that help companies organize and manage e-business applications and databases, ranks as the best performing IPO nationwide for the year.

Handspring Inc., the Mountain View, Calif., hand-held computer company started by the creators of the Palm Pilot, proved to be one of the best-performing deals of the year. Handspring’s shares rose nearly 130% from its Nasdaq debut on June 20.

Another winner: Nuance Communications, a Menlo Park firm that develops voice interface software. It went public April 12 at $17 a share and was trading around $35 late last week.

Among Southland deals, California Pizza Kitchen, a Los Angeles-based restaurant chain, enjoyed a strong reception from investors. The company went public at $15 a share Aug. 2 and was above $30 last week.

Debora Vrana can be reached at debora.vrana@latimes.com.

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California’s 2000 IPOs: A Sampling

In a year when initial public stock offerings nationwide fell an average of 25.8%, IPOs of California firms fared even worse, falling nearly 28%. Here are some of the best- and worst-performing new stocks of California companies, based on percentage change from their offering price (as of Dec. 20):

WINNERS

*--* IPO IPO Recent % Name Business City Ticker date price close change

Embarcadero software San EMBT 4/19 $10 $42.44 324% Technologies Francisco

Stanford radio Sunnyvale SMDI 5/25 12 29.81 148 Microdevices frequency

Nuance software Menlo Pk. NUAN 4/12 17 35.83 111 Communica- tions

Handspring hand-held Mountain HAND 6/20 20 33.94 70 computers View

ONI Systems optical San Jose ONIS 5/31 25 36.19 45 networking *--*

LOSERS

*--* IPO IPO Recent % Name Business City Ticker date price close change

Pets.com retail San IPET 2/10 $11 $0.09 -99% Francisco

ImproveNet home Redwood IMPV 3/15 16 0.27 -98 Inc. improvement City info

Snowball.com online San SNOW 3/20 11 0.19 -98 media Francisco