Some IPO Quiet Periods Are Louder Than Others

PlanetRx.com had analysts chattering with an Aug. 31 announcement it was selling a 19.9% stake to Express Scripts (ESRX), one of the nation's largest pharmacy benefit-management companies. But the talk was less about the news than about its timing, coming as it did right before the online drugstore was to go public.

"The timing is too coincidental," internet.com analyst Tom Taulli says of the PlanetRx.com alliance. PlanetRx.com, which is in its SEC-regulated quiet period, declined to comment for this story.

PlanetRx isn't alone: More and more companies are disclosing key strategic alliances right before their IPOs in a practice that can help put a positive spin on an offering. The risk is that some observers inevitably see these announcements as last-ditch efforts to gain publicity despite the quiet period, during which companies are prohibited from hyping their stock.

"We've noticed it more in the last several months, especially with Internet IPOs," Vincent Slavin, a sales trader who tracks IPOs for Cantor Fitzgerald, says of the alliance announcements.

Indeed, Drugstore.com (DSCM), PlanetRx.com's main rival, announced an agreement with Rite Aid (RAD), which owns a prescription benefits manager, shortly before its July IPO. MP3.com (MPPP) announced a joint venture with Cox Interactive Media a month before the online music distributor came public in July. And Liquid Audio (LQID) inked a deal with EMI before its July debut.

For unproven Net companies, many of which have no revenue or earnings, a strategic alliance helps get them on the map. "Companies will use [alliances] to gather investor focus to their company," says Slavin. "If they didn't have those, they'd be nothing."

"A big deal will carry you through the IPO," Taulli explains. "It'll give you a lot of ammo so that when you go on the road show, [investors] are all excited."

The Express Scripts alliance is crucial for PlanetRx.com, which is dependent on firms like Express Scripts for filling prescriptions and coordinating payments from insurance carriers. Such an alliance was also necessary to boost investor confidence before the IPO, expected by the end of this month.

In a filing with the Securities and Exchange Commission, PlanetRx.com acknowledged this risk: "If we are unable to obtain additional contracts with insurance companies and PBMs ... our business may be harmed."

The downside to such propitious timing is that some people may start to question the motives of such a well-timed press release. "You do have to wonder if it's an attempt to condition the market in a backdoor way," says David Bayless, a securities lawyer based in San Francisco. "You could say a company is managing its IPO by trying to arrange the deals so they'll come to fruition right before it comes public."

Of course, companies say that the news is released because it contains material information for investors. "It's a plug for the stock, but it's also good information that might not come to light otherwise," says Randall Roth, senior analyst with Renaissance Capital's (IPOSX)IPO Plus Aftermarket fund.

Of its deal with EMI, Liquid Audio plays up its obligation to investors. "What you saw from Liquid Audio was a very toned-down press release," says spokeswoman Andrea Fleming. "It's important when you have a major agreement to disclose it unilaterally to the market." The deal garnered international exposure from The Wall Street Journal and The Times of London.

Medscape, a health-related site set to go public this fall that recently announced a multimillion-dollar deal with AOL (AOL), maintains it was following its normal course of business. "You have to do it when the transaction is ripe," says CEO Paul Sheils. The press release "was vetted by our lawyers to make sure it didn't have any forward-looking statements."

But some analysts believe companies hide behind the quiet period by issuing largely optimistic news. "It's very selective. The only thing out there is really positive news," says internet.com analyst Taulli.

And it's nearly impossible to tell whether a stock is actually affected by news before the IPO. It's a fine line, says Brian Lane, director of the SEC's corporate finance division: "Where's the line between normal business communication and hyping the stock?"

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