T-Online Enters Rocky Markets -- Successfully

BERLIN -- The initial public offering of Deutsche Telekom's (DT) Internet service provider T-Online was considered a qualified success in light of the environment into which it was brought.

Yet, even though T-Online was able to brave the most uncertain of market conditions on Monday, it would be rash to suppose that this heralds a return to the heady days when any Web-related European stock had cash thrown at it. Instead, the experience of T-Online provides further evidence that investors are likely to be more selective in choosing European Internet stocks over the coming months.

Deutsche Telekom floated T-Online at 27 euros per share, which valued the spinoff at around $3 billion. While the rest of the markets in Europe were falling on Monday, shares in T-Online rose nearly 40% and on Tuesday were up a further 0.60 euros, or 1.6%, to 38.10 euros.

This should probably come as no surprise considering what T-Online represents.

A Big Fish in a Small School

Although Deutsche Telekom said T-Online made an unspecified net loss in the first quarter, it garnered a record number of new customers during the period and with its roughly 5 million customers, it is second only to the world's largest ISP, America Online (AOL). As a result, the issue was some 20 times oversubscribed.

"T-Online is a market leader, everybody has to have it in their portfolio," explains Jens Wilhelm, a fund manager for Deutscher Investment Trust in Frankfurt.

However, to pull off the IPO successfully in volatile markets and avoid the fate of other recent disappointing Internet IPOs, such as the Lycos (LCOS) venture, Lycos Europe, Deutsche Telekom was forced to play it safe.

Deutsche Telekom's chairman Ron Sommer was likely more concerned with not alienating investors than with making a quick buck. With more Deutsche Telekom shares to be sold this summer and the flotation of its wireless unit T-Mobil next fall, retaining confidence in Deutsche Telekom's name was paramount.

As such, T-Online was priced near the bottom of the book-building range of 26 to 32 euros and far below the heady expectations of between 45 and 50 euros, if you believe the press reports.

While T-Online managed to navigate the choppy waters, "Other upcoming [European Internet] IPOs may not have it so easy," argues Deutscher Investment Trust's Wilhelm.

A Fish Out of Water

Some, like leading U.S. search engine AltaVista, have recently scrapped plans to sell shares, realizing it lacks T-Online's impressive size and brand recognition in Europe. And plans by GMX, the German equivalent of the email service Hotmail, to go public in late May or June look pretty foolhardy at present.

A safer bet than GMX and its ilk might be Commerzbank's (CRZBY) online bank and brokerage Comdirect. Expected to float in June, it has a pedigree almost as favorable as T-Online's: a well-known parent and a respectable market share. Furthermore, Comdirect has actually tied its caboose to T-Online's train through a high-profile business agreement.

Unfortunately, for most European Internet firms out there hoping to go public, few are associated with or compare to T-Online. As such, even being classified as a "qualified success" looks beyond the reach of most at present.

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