Wall Street Overtaken With IPO Fever as FreeMarkets Joins the Parade of High Flyers

The stock closed more than $200 above its offering price.
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Updated from 12:26 p.m. EST

It was love at first sight, and almost everyone on Wall Street was smitten.

Investors were agog over

FreeMarkets

(FMKT)

on Friday, bidding the company's stock up well over 400% in its first day of trading. FreeMarkets' underwriters had tried to anticipate some gains, tripling the offering price to $48 from an initial $14 to $16 before turning the stock loose.

Even

Goldman Sachs

and

Morgan Stanley Dean Witter

, the lead underwriters, were outdone in their estimations of the Street's lust. In an extraordinary move before FreeMarket began trading,

Bear Stearns

set a 12-month price target of $300 a share.

Wall Street itself nearly matched that price target in just a few hours. Shares of the business-to-business online auctioneer climbed 232, or 482%, to close at 280. They had traded as high as 293. Trading volume totaled 7.8 million shares, more than twice the number offered.

Strangest, perhaps, was that the outpouring of affection was so scarcely odd. It capped a week in which at least five other initial public offerings exploded in their first days on the Street.

"The whole thing is momentum," said Paban Raj Pandey, an analyst at

IPO Maven

, a research firm, and editor of the

Tech Pulse

newsletter. Pandey doesn't rate stock, and his firm doesn't do underwriting. "Every company is thinking now is the time and they're cashing in on it. The money is flowing in and it's got to go somewhere."

FreeMarkets itself pocketed about $173 million from the sale of 3.6 million shares, but IPO investors shared $835 million in first-day paper profits.

On Thursday,

VA Linux Systems

(LNUX)

notched the largest first-day

gain ever for an initial public offering. Linux shares climbed 209 25/32 --a stunning 698% -- to close at 239 25/32. That broke the record set by the IPO of

theglobe.com

,

(TGLO)

which posted a first-day gain of 606% in November 1998.

Earlier in the week,

Agency.com

(ACOM)

,

Andover.net

(ANDN)

and

Jazztel

(JAZZ) - Get Report

rode the adrenaline-flush IPO market, tripling in price.

Agency.com, an Internet consulting and advertising company, closed up 194% on its first day

Wednesday. Andover.net, which provides free hardware and software for Linux operating programmers, closed its first day up 253%.

The American depository receipts of Jazztel, a Spanish telecommunications equipment maker, climbed 247% on its first day.

And

AirNet Communications

(ANCC)

, which makes wireless products, rose 194% on its first

day.

By Friday however, most had lost some of the ground they had gained, while Wall Street turned its eyes to FreeMarkets. Jazztel fell 7, or 12%, to 52 1/16. Andover.net was also off 12%, or 9 11/16, to 69 1/8. Agency.com slid 3 5/8, or 6%, to 61 15/16. VA Linux tripped 9%, losing 28 3/8 to 222. On the other hand AirNet was up 1 3/16, or 3%, to 36 5/8. (Jazztel closed down 6 1/4, or 10%, to 52 3/4, Andover.net finished down 10 13/16, or 14%, to 67 1/2, Agency.com finished down 3 7/16, or 5%, to 62, VA Linux closed down 24 3/8, or 10%, to 218, while AirNet finished up 3/4, or 2%, to 36 1/8.)

FreeMarkets, which is based in Pittsburgh, runs so-called reverse auctions on the Internet for buyers of industrial parts, raw materials and commodities. Suppliers compete against each other's prices.

Like many Internet companies, FreeMarkets says it is losing money as it focuses on growth. According to filings with the

Securities and Exchange Commission

, the company has depended on two clients,

United Technologies

and

General Motors

(GM) - Get Report

, for most of its revenues so far. Payments from those companies comprised 77% of 1998 revenues and 65% of revenues in the six months ended June 30, 1999.

Scott Ehrens, the Bear Stearns Internet/new media analyst who set the price target of $300 a share this year for FreeMarkets, also set a $540 target over three years.

Other people on Wall Street were surprised by Bear Stearns' move. "We've never seen it before, rating it before it goes public to jump the moon right away," said Thomas O'Keefe, a research analyst at

First Call/Thomson Financial

, the agency that tracks analysts' opinions.

While the stock's price moves will likely be volatile, Ehrens said in an interview, it should increase in value over time.

Invoking the

Rev. Dr. Martin Luther King Jr.

in his report on the company ("Free At Last! FreeMarkets at Last!"), Ehrens ascribed much of the company's value to the savings it could provide for clients.

"It's a company that we think is terrific," he said. "We wanted to be associated with it."

Bear Stearns did not participate in the underwriting because "that was something that was locked up before our bankers talked to them," Ehrens said.

Paban, the IPO Maven analyst, also said FreeMarkets' business model looks promising.

The measure "that we use for businesses that have a consistent stream of earnings don't apply here," Pandey said. "I go for a business model that makes sense and a leader in its industry. FreeMarkets has been around for a long time."

The company was founded in 1995.