Internet Consulting Companies Disappear From IPO Calendars

In two shattering days, the hopes of almost 10 companies waiting to go public were badly dashed.

Internet consultant Viant(VIAN Quote) surprised the market on Aug. 31 by warning that it expects to report a third-quarter loss, instead of a projected profit. A day later, after a raft of analysts cut their ratings on the company and others in the sector, Boston-based Viant's shares fell 41% and hit a 52-week low. To make matters worse, competitor iXL Enterprises (IIXL Quote) said that it too would sustain a third-quarter loss and fell 16% the next trading day.

The first casualty of that news, Infinite Technology Group, which designs, constructs and hosts Web sites, withdrew its initial public offering on Sept. 6, "due to market conditions." On Monday, Zefer disappeared from the unofficial IPO calendars, without formally postponing or withdrawing its issue.

Those moves underscore the dire straits of a sector suffering from the slowing pace of projects commissioned by companies, both dot-com and not, as well as increased competition from larger, more established players. Scient (SCNT Quote) is down 76% from its 52-week high, Viant is off 85% and iXL is down 89%.

What Happens Now?

If many of the public companies in the field are hovering near their lows, then whither the private companies that aspire to public status? Even with Infinite Technology's exit, there are at least nine Web consulting companies still in the pipeline, all of which could struggle without the funds raised from an IPO.

The Internet consulting sector took its first major hit when tech stocks sustained dire losses in an April correction. With that, money dried up for Internet companies and, subsequently, for their projects.

A series of withdrawals and postponements among Internet consulting firms began soon after. Zefer initially filed for an IPO on Jan. 7, but on May 2 withdrew its offering (only to refile on July 7). Nexgenix withdrew its IPO on May 17, and Greenwich Technology Partners did the same in June, only to refile on Aug. 23. Concours Group postponed its issue on Aug. 11, and Fort Point Partners pulled its IPO on Aug. 21.

It also doesn't help that 14 Web consultants went public in the past year, including Agency.com (ACOM Quote), Lante (LNTE Quote), Inforte (INFT Quote) and Digitas (DTAS Quote).

"There was a premium for newness in the information technology space over the last 12 months. That premium has gone away as companies preannounce [earnings shortfalls]," says Thatcher Thompson, an analyst at Merrill Lynch. "The market has more than it can digest."

The Options

That means companies hoping to go public have three options, Thompson says: "One, they go public at the price they want to, but the likelihood of that has diminished. Two, they lower the size and price of the offering. Three, they wait until the market environment is a little better."

Only KPMG Consulting appears on the immediate IPO horizon.

But KPMG is a different animal from the rest of the Web consultants waiting to go public. Sure to generate great interest in the market, the well-known and well-capitalized consulting arm of the Big Five accounting firm raises few fears that it will run out of money anytime soon. The McLean, Va.-based company plans to raise $2.5 billion by offering 324.3 million shares for $6.75 to $8.75 each. With Morgan Stanley Dean Witter(MWD Quote) as lead manager of the deal, KPMG is slated for a fall listing.

The prognosis for Web consultants that wait is less clear. "It depends on how much cash it's burning," says William Loomis, an analyst at Legg Mason. "If it's a decent company, it should be cash positive."

However, many of them are cash negative or cash-flow negative, which means that they use more cash than they generate and thus need the funding from a stock exchange listing. For instance, both Zefer and Greenwich are cash-flow negative for the six months ended June 30.

Expenses

Still, these companies generally aren't capital-intensive, unlike a Global Crossing (GBLX Quote) that builds networks which require billion-dollar investments. "They open an office, hire some staff and accept operating losses [for awhile]," says Thompson at Merrill.

However, many of them "have grown very aggressively. They've opened offices without having contracts in place," Loomis adds. "They'll have to cut back and close some offices."

For example, Zefer has five offices, including a New York office that opened with great fanfare in January. Greenwich Technology Partners has a dozen offices and made at least two acquisitions in the past six months. Novo Group and Logical Design Solutions operate in three locations, Fort Point Partners in four and Concours in three in the U.S. and six abroad.

Cutting back may not be enough. Should these companies require further funding while sitting on the sidelines of the public market, private financing is an option but an expensive one, according to Loomis, requiring the company to give up a larger chunk of equity to venture capitalists. And should they become more desperate, an acquisition by a larger competitor doesn't seem a viable option for now.

"It's very possible that there will be some consolidation, but the stock of the larger competitors is off 80% to 90%," Loomis says. "They do have a lot of cash, but they see what the valuations are doing and they'll pay much less than these companies would have a expected a couple months or six months ago."