No Bubble in the Offerings

IPOs are back and aftermarket gains are solid. But it's not 1999 again.
By Bill Snyder ,

The newly invigorated IPO market may look like a Ferrari, but peek under the hood and it's more like a respectable Toyota.

Although initial public offerings are hitting the market faster than at any time since the bubble collapsed, returns to shareholders aren't even close to the returns of the boom years. The 104 companies that have gone public since June 1 have, on average, posted aftermarket gains of about 24%, a solid but hardly spectacular performance. Some shareholders may be disappointed, but the relative sobriety is a sign of health, and undermines arguments that investors have once again lost discipline.

"It's a very definite contrast to the bubble years -- investors are being careful about new issues," said Silicon Valley stalwart Sandy Robertson, now a partner of Menlo Park, Calif.-based Francisco Partners, a technology-based buyout firm with about $2.6 billion in assets.

More careful indeed. There's nothing among the recent crop of IPOs to compare with companies such as

Commerce One

(CMRC)

, which debuted on July 1, 1999, at $101 a share and ended that year at $982. Or

Internet Capital Group

(ICGE)

, which rose about 1,300% in the five months following its IPO in August 1999. (As a reminder that past IPO performance is no guarantee of future returns, Commerce One closed Wednesday at $1.76; ICG at 35 cents.)

More proof that it's not 1999 all over: Tech stocks have lost their starring role in the more sober atmosphere of 2004. While the 21 information technology-related companies that debuted in the past eight months gained an average of 14.6% post-IPO, 15 pharmaceutical and biotech offerings appreciated by an average of 42.3%. Even real estate investment trusts, hardly the stuff of bubble-era dreams, are outperforming tech.

Tech IPOs the Star No More
Aftermarket performance of IPOs shows
technology offerings underperform

*Information-technology includes semiconductors, software and services, as well as telecom, e-commerce retail and computer hardware.
Source: IPO Vital Signs.com

One big reason for technology's unspectacular performance is there's no "next new thing" to capture the imagination and send investors scrambling for their wallets. "You could catch the wave of the Internet or

business-to-business software in 1999. Now what's out there?" said Daniel Morgan, a technology fund manager with the Noble Financial Group.

Still, it would be a mistake to underestimate the marked upturn in the IPO market in the last few quarters.

Since June 1, 104 companies have gone public and 58 more have registered, according to IPO Vital Signs.com, which tracks public offerings. By the end of the year, the IPO class of 2004 will total 200 to 250, according to various estimates; either way, that'll more than the combined offerings in 2003 and 2002.

Thomas Weisel Partners expects 250 offerings this year, and 350 in 2005. Graeme Howard, editor of IPO Vital Signs.com, is a bit more conservative, saying he believes there will be about 200 offerings in 2004.

Meanwhile, investors who did well when the stock market roared to life in 2003 need someplace to put their money. "VCs are still overfunded. Perhaps not by the

huge amounts you've read about, but overfunded," said Jim Breyer of heavyweight venture firm Accel Partners.

As the IPO market comes back, some investors are worried that bankers or VCs might take advantage of the boomlet by bringing companies public prematurely.

"We're seeing inflated values in companies that have gone out recently, and some seemed barely ready to go public," said Joanna Rees Gallanter, founder and managing partner of San Francisco-based Venture Strategy Partners, which has assets of $200 million.

Howard disagrees. "The level of maturity of companies is higher now than it was during the bubble. You're seeing companies with significant revenue and earnings, and seasoned executives running them," he said.

Robertson believes that if money begins to pour into mutual funds and the pressure mounts to fund IPOs, quality could get thin at some point. "But we're not there. I see solid prospects like Google and Salesforce.com," he said.

New-Issue Environment Becomes More Inviting
After a drought, IPOs show promise of a rebound

Source: Thomas Weisel Partners

Up, but Not Away

Who's hot in the recent IPO crop?

So far, the runaway winner is

Vaso Active Pharmaceuticals

(VAPH)

, a small-cap stock that debuted on Dec. 9 at $5 and closed Wednesday at $28.50, a gain of 470%.

But one wonders if Vaso best epitomizes the new, "more mature" IPO market or harkens back to the slack standards of the boom era.

The Danvers, Mass.-based company was taken public by the relatively unknown Florida underwriter Kashner Davidson Securities and is not yet profitable. It sells a treatment for athlete's foot called Termin8, which it says is endorsed by the American Association of Medical Foot Specialists. But there is a dispute about whether the claim is true. Insiders hold a bit more than 75% of the shares.

Next best on the performance list is biopharmaceutical company

Neurochem

(NRMX)

, which has appreciated 88% since debuting Sept. 18. The company has three orally administered product candidates in clinical trials, including Alzhemed, for the treatment of Alzheimer's.

For the quarter ended Dec. 31, the Toronto-based company's net loss amounted to $9.9 million, or 34 cents a share, compared with $6.6 million, or 31 cents a share for the same period in the previous year. For the six months ended Dec. 31, 2003, net loss amounted to $16.8 million, or 63 cents per share, compared with $10.5 million, or 52 cents per share, for the same period in 2002.

Kintera

(KNTA)

is the best-performing tech stock, up 79% since mid-December. Kintera, a small-cap company, develops software for non-profits. The San Diego company's revenue was $2.8 million for the fourth quarter of 2003, up from $2.2 million in the third quarter of 2003 and from $600,000 in the fourth quarter of 2002. The net loss for the fourth quarter was 23 cents per share, the same as the prior quarter.

The overall worst performer among the group is

Centennial Specialty Foods

(CHLE)

, a Colorado-based distributor of canned specialty foods. The company's stock is off 51% since debuting at $5 a share on Oct. 29.

The caboose of the tech-stock IPO train has been

RedEnvelope

(REDE)

, an e-tailer specializing in gifts. Earlier this week, the company hit a 52-week low of $9, down 36% from its Sept. 24 offering price of $14. RedEnvelope had problems completing deliveries during the crucial Christmas season, but said recently it has resolved the issue.

Please note that due to factors including low market capitalization and/or insufficient public float, we consider Commerce One, Internet Capital Group, Vaso Active, Kintera, Centennial Specialty Foods, and RedEnvelope to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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