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Insatiable Mutual Funds Keep IPO Party Going, if at a More Sober Clip

Adam Lashinsky

The IPO party is not over. But with the tech-stock market in bear territory, the celebration has downshifted from a wild frat party to a more sophisticated gathering.

What's noteworthy about the state of the market for IPOs is that any are occurring at all. In a market characterized by sagging tech stocks, new offerings typically grind to a halt, as they did most recently in the summer of 1998. Yet shares of communications software maker Nuance (NUAN Quote) nearly doubled from the offering price in their debut Thursday. Shares of Corillian(CORI Quote), a software company focused on the financial services industry, also gained, closing up more than 50% above their offering price.

"The reason the IPO market is not dead is that we're not seeing any redemptions" from mutual funds, says John Marren, an investment banker in Morgan Stanley Dean Witter's Menlo Park, Calif., office. In other words, with so much money in the hands of institutional investors, there will be an appetite for some deals.

"In an environment when the Nasdaq is selling off every day, it's difficult to get deals done," Marren says. "But this is still where the excitement is."

Adds Cristina Morgan, co-director of investment banking for Chase H&Q in San Francisco: "Portfolio managers aren't paid to sit on the sidelines. They're paid to put their money to work."

Still, fund managers burned by buying issues that have plummeted will apply some once-bitten-twice-shy mentality to their investments. The upshot is that so-called concept companies, or upstarts with no clue as to when they'll break even, won't bother trying to go public.

"I think we'll see a refocusing on business models where investors can see significant revenue momentum, and models where investors can see their way to profitability pretty easily," says Michael Ogborne, co-head of investment banking at Thomas Weisel Partners in San Francisco.

Bankers aren't willing to discuss individual deals in their pipeline for fear of arousing the Securities and Exchange Commission. But a consensus among them is that companies engaged in optical networking and Internet-infrastructure software will continue to try for IPOs. Two expected bellwethers are ONI Systems, a fiber-optics company in San Jose, Calif., and SkyStream Networks, a so-called next-generation networking company in Mountain View, Calif., which makes routers for digital communications systems.

If those deals were delayed, it would be a sign that the IPO market indeed is shutting down.

Less certain are huge offerings in which investors very likely will question New Age valuations. AltaVista, for example, hopes to raise as much as $200 million. The SEC has delayed the IPO of the search-engine-turned-Web-portal company controlled by CMGI (CMGI Quote), but the offering is expected shortly.

Divine interVentures, a Chicago-area "incubator" of new Internet businesses, hopes to raise as much as $160 million. But that company, with a very short operating history, has blatantly modeled itself on Internet Capital Group (ICGE Quote), whose shares have collapsed of late to 41 13/16, about 80% below their high of 212 in January.

Another sign of IPO investors' appetite will be the offering for AT&T Wireless, which is raising in excess of $10 billion and is currently conducting its IPO roadshow. If the market is willing to bite down on such a large offering, it couldn't possibly be too ill.

Investment community sources say another company to watch is Corvis, a Columbia, Md., optical-networking start-up headed by the founder of Ciena(CIEN Quote). The company hasn't yet filed for its IPO, but is expected to shortly.

Secondary stock offerings, the issuance of shares by already public companies, are just about dead for the time being, investment bankers agree, especially for companies whose stocks have fallen precipitously. And if investors in the IPO are under water because of increased supply, a secondary is out of the question. Says Morgan Stanley's Marren: "Once you get below the issue price, the secondary market doesn't exist."

"What we've seen go away is those very large strategic secondaries for companies that were looking to take advantage of a high stock price," says Chip Vetter, head of corporate finance for Robertson Stephens in San Francisco. He notes that such secondaries serve to pad a company's cash reserves and relieve the pressure from eventual insider selling, but aren't considered crucial. A perfect example is SciQuest (SQST Quote), the online exchange for the life sciences industry that withdrew its secondary offering Wednesday. Secondaries often weigh down stocks because of increased share supply, but removing them sometimes helps a beleaguered stock. But shares of SciQuest, already 82% off their high on Wednesday, fell an additional 24% Thursday to 12 21/32.

Bankers say that if the IPO market slows considerably, private companies with their businesses on track will seek additional private capital from sources such as "crossover" funds that invest in public and private companies. Others inevitably will quicken their efforts to sell themselves to the highest bidder.

Chase H&Q's Morgan is quick to include a commercial plug, but a germane one, about public companies. It's this: Chase H&Q's annual technology-stock conference is scheduled for the week of May 8. Assuming the market continues to flounder, Morgan guesses that among the 300-plus companies presenting at the conference will be more than a few whose stocks trade at their all-time lows but continue to have healthy businesses.

If nothing else, investors will have time to consider such companies. After all, they're less likely to be distracted by attending scores of roadshow meetings for IPOs.