IPO Froth Disappears, and Investors Wonder if a Chill Is On the Way

With the tech sector growing stormier by the day, the waters of the IPO market have been roiled as well.

January, February and March have each set records for the dollar value of IPOs coming to market. But, befitting the new-issue glut that several IPO watchers say has formed, March saw a marked decline in IPOs' aftermarket performances and an increase in the number of issues trading below their offer prices.

Now, as offerings get delayed or pulled altogether, market watchers are wondering how hard it will be to sell an IPO if Nasdaq continues its recent antics. And the recent tech selloff has some pointing to nontech deals as the ones to watch while tech continues to get battered.

Ebb and Flow

Observers say the run-up in tech issues last year encouraged a surge in the number of deals coming to market. And in terms of both supply-and-demand and performance, those trends couldn't continue.

"Nasdaq did things that were unprecedented," says Vinnie Slavin, a sales trader who tracks IPOs for Cantor Fitzgerald, referring to the index's 86% gain a year ago. "Nothing made sense and now you're paying for it. It's excess on the upside and excess on the downside."

So March saw average aftermarket gains drop to 37% from a startling 194% for 1999, and deals started to be delayed.

Companies and underwriters are starting to feel the effects of the downdraft. Monday, Modus Media International postponed its IPO. Lead underwriter Salomon Smith Barney declined to elaborate. IPO watchers say deals that were slated to go are being put off while underwriters keep an eye on the markets. "A lot of deals have been delayed between late last week and yesterday," says Joe Missett, head of the capital markets group for CIBC World Markets.

Backing Away

"Buyers got skittish and backed away," Missett continues. "The overall market dictates IPO appetite."

But there may be other factors, observers say, including a backlog with the Securities and Exchange Commission.

"The majority [of deals] are being delayed because of market conditions, but there are some that are being delayed by the SEC," says Joe Hammer, head of capital markets and the syndicate desk for Adams Harkness & Hill. "There's a huge backlog there."

Indeed, there are currently 268 deals in registration, nearly double the 136 deals in the pipeline at this time last year. Hammer adds that the SEC is being extra careful due to the highly speculative nature of many of the companies in registration. (A spokesman for the SEC says there is "no evidence of a backlog as far as turnaround time with regards to initial comments going out.")

Drop in the Bucket

The dropoff in performance began with the beleaguered e-commerce sector early this year. "It's a bad sign for Internet IPOs when the shipping charge is more than the stock price," says Richard Peterson, a strategist with Thomson Financial. MotherNature.com (MTHR), for example, is trading around 2 and change.

In the wake of the tech selloff, some are recommending nontech deals. "Krispy Kreme will work because it's nontech. It's donuts -- how could you go wrong in this environment?" says Slavin. Krispy Kreme is slated to start trading Wednesday.

Another deal to watch for Wednesday: MetLife. "It's not sexy, but they make money," says Randall Roth, senior analyst with Renaissance Capital's (IPOSX)IPO Plus Aftermarket fund.

Yes, that's the idea.

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