After a Dry Summer, Fall Could Bring a Flood of IPOs

The IPO market appears to be getting its legs back, just in time for Y2K.
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Digital Insight

, a Calabasas, Calif.-based company that provides Internet banking services to small and midsize banks and credit unions, hopes to go out with a bang. Set to go public Friday with 3.5 million shares priced at $15, Digital Insight is backed by powerhouses

Morgan Stanley Dean Witter

,

Deutsche Banc Alex. Brown

and

Banc of America

.

After a shaky summer, the initial public offering market is showing signs of resilience despite Wall Street's recent jitters. The IPO momentum is set to continue next week with

Calico Commerce

, a maker of online purchasing software. Even though, like a typical dot-com company, Calico is losing money -- it lost $4.7 million on revenue of $7.4 million for three months ending June 30 -- observers expect the IPO to be a success.

"It should go through the roof," says

internet.com

analyst Tom Taulli.


Number of IPO issues in 1998 and 1999

Source: Thomson Financial Securities Data

One reason is that investors are seeking new issues again, after a scarcity of offerings in August and the first half of September. But more importantly, Calico is a business-to-business deal, which is the flavor of the month for investors, along with Internet infrastructure companies.

Foundry Networks

(FDRY)

popped 525% on its first day Tuesday. Foundry was not alone:

InterNAP Networking Services

(INAP) - Get Report

jumped 165% to close at 53.

But tumult can still roil the IPO market, and a number of companies may have trouble getting out of the door. "I think we're in for some turmoil," says Randall Roth, analyst with

Renaissance Capital's IPO Plus Aftermarket Fund

(IPOSX)

. "Quality is few and far between."

Women.com

, which postponed its offering in August, is still too afraid to test the IPO waters, and

FTD.com

(EFTD)

, which went public this week, barely closed above its offering price of $8, even though its price range had been revised downward.

Yet, the IPO pipeline isn't drying up. Another 78 deals are slated to go out before the end of the year, 52 of them in October alone, according to

Thomson Financial Securities Data

. It's a sharp increase from last October, which only saw six issues. Overall, 1999 could see 500 deals, raising a record $50 billion. That's up from 374 deals in 1998, which raised $36.8 billion.


Proceeds of IPOs in 1998 and 1999

Source: Thomson Financial Securities Data

But analysts don't think the increased numbers are necessarily a good sign. "Most of the Street is awfully quiet," says Vincent Slavin, an institutional sales trader who tracks IPOs for

Cantor Fitzgerald

.

Healthy or not, the IPO glut seems to be following a trend. According to Richard Peterson of Thomson Financial Securities Data, the fourth quarter has traditionally been a big quarter for IPOs: It's been the strongest quarter for the past five out of eight years. Peterson says companies feel pressure to get out before the end of the year, due to a number of factors. "Individual investors may feel they can get a better return by adding IPOs to their portfolios and mutual fund managers feel compelled to dress up their portfolios," Peterson says. "And the whole point of the IPO is to raise money. A lot of these companies have cash crises and need the money."

This year is no different, and Year 2000 fears may actually exacerbate the effect. "People are going to be edgy," says Renaissance Capital's Roth. "We can't forget the wild card which is Y2K. The 9/9/99 thing was kind of a warm-up, but we still have to get over Y2K."