Investment banks are still fighting off an unyielding New Year's hangover brought on by the first quarter's devil-may-care initial public offering binge.
It's those first-quarter IPOs -- mostly tech and Internet stocks -- that are dragging down the aftermarket performance records of tech banks such as
Credit Suisse First Boston
In the heated competition to grab the highest quality IPOs in a sluggish market, lackluster aftermarket performance can hinder an investment bank's ability to lure other new issuers, and if poor numbers endure, it also can alienate institutional investors from a particular bank's deals.
The damage has spared few players. The shares of the 15 companies Robertson Stephens brought public in the first quarter were down 56% as of last week, and its two second-quarter IPOs were down 87% from their offering prices. Chase H&Q's seven first-quarter IPOs have fallen around 50%, and the 12 deals
brought out in the first quarter were down around 50%.
It looks a little better if IPOs completed up to halfway through the fourth quarter are included. Robertson Stephens offerings are off an average of 38%, and Chase H&Q's are down 31%, the two worst among the top-10 investment banks, according to
. CSFB's deals have fallen 15.7%. On the other end,
Deutsche Banc Alex. Brown's
28 deals are up 9.4%.
has posted the best aftermarket performance, according to CommScan, with an average return of 12.7%, but that has come on just nine deals.
Surely, the tech wreck of 2000 has stocks old and new well off their highs, a factor that may mitigate some of the damage. Still, the aftermarket performance is an important measure for banks, according to Michael Flanagan, of
Financial Services Analytics
, an independent research firm in Ft. Washington, Penn. "It's a slide investment bankers like to show in their presentations," he says.
According to Todd Carter, the head of investment banking at Robertson Stephens, it's the ghost of first-quarter past that's haunting tech-centric banks as the holidays approach. He says his firm's third-quarter IPOs are up about 11%. The bank's big problem was the first quarter, when 12 of its 15 new issues were Internet stocks.
Catching the Wave
"These things move in waves," Carter says. "We had a high concentration of tech and Internet stocks, so we changed the kind of companies we're financing to include more optical and telecom companies."
And it goes almost without saying that Carter and his counterparts at the other leading investment banks aren't slapping any ebullient valuations on new issues. "We've had to bring down valuations to suit the market. We had been in an environment that matched high valuations with young companies," he says. "By next year, Q1 will be well behind us."
A stock's performance has to be put in context of the sector and the time period since its IPO. Almost every part of the tech sector has been bushwhacked since April, and that's about the point when IPOs started to fall apart.
"There's a big difference between pricing a deal and having the market collapse and mispricing a deal," Carter says. "We're as experienced at this as anyone, and we can quickly adjust to the market environment."
Nowhere but Down
Robertson Stephens' performance is being dragged down by first-quarter disasters such as bricks-and-mortar college bookstore
, down about 98% since its Feb. 15 IPO, and
Integrated Information Systems
, which has fallen more than 90% since its March 17 debut.
Such dismal numbers may be epidemic this year, but that can matter little to companies seeking a banker to take them to the public markets. Aftermarket performance often "will tell you who is getting the higher-quality deals," says Randall Roth, an analyst with
, which runs the
IPO Plus Aftermarket
Robertson Stephens and Chase H&Q are still considered top-tier investment banks in the tech world, but the sector's slow, painful demise has been hard on them and other major firms that fattened up on Internet and tech IPO fees. "There's been a sea change in the way people perceive valuation," Roth says. "And there's no liquidity
in tech stocks. You can get stuck in some of these and can't get out."
Tech's problems even have hurt overall performance at more diversified banks like Goldman and
Morgan Stanley Dean Witter
. Goldman's 41 deals have returned an average of 2.9% in 2000, while Morgan Stanley's IPOs have fallen an average of 7.5%, according to CommScan.
All told, roughly 60% of IPOs that have hit the market since January are below their offering levels. The April tech stock calamity weighs heavily in those numbers as well because more than 80% of first-quarter IPOs are below their offering levels.
Robby's Carter says tech-focused banks, and those focused more on growth-oriented names, typically go through dramatic performance cycles. "Our upside doesn't get as muted
as a bank that does a broader range of deals and our downside doesn't get as muted," he says.
And as for the slides Carter's troops will show at presentations, he leans toward the three-year rolling performance number rather than quarterly returns.
Some think sagging aftermarket performance of IPOs doesn't carry ill feelings for either issuers or clients. "People will forgive and forget over time, and
aftermarket performance tends to get looked on a deal-by-deal basis," says Michael Holland, the manager of the
Holland Balanced Fund. "Never underestimate the short memory of Wall Street."
Underestimate it? Heck, tech bankers will be counting on it.