August's Woes Augur More Worries in the IPO Market

IPOs have been postponed with some regularity, and those that come off often bear reduced sizes and prices.
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Six weeks ago, HarvardNet, a Boston-based provider of high-speed Internet access, eagerly awaited its chance to go public. Offering blisteringly fast digital subscriber line, or DSL, technology, HarvardNet hoped it could establish itself as a technology infrastructure play in a summer IPO market glutted with Net me-toos.

With the muscle of

Morgan Stanley Dean Witter

,

Merrill Lynch

and

Salomon Smith Barney

all pulling for the company, HarvardNet was expecting to raise $124 million.

But the stock market wilted under the deluge of Web offerings and the scorching heat sent a number of companies packing their bags and abandoning their public offerings. Even mighty Morgan Stanley was forced to delay the HarvardNet offering. The bank will hold its powder dry until after Labor Day, hoping for a more receptive market.

HarvardNet isn't alone. According to

CommScan

, a New York investment banking research firm, 32 companies postponed or withdrew their offerings in August in reaction to bleak market conditions. That means slightly more than half of the IPOs expected for the month actually made it out: Of 74 IPOs filed, only 42 made it into the public market. But even that was small comfort for some. Six August IPOs are trading below their offering prices, including the highly anticipated

1-800-Flowers.com

(FLWS) - Get Report

.

Now analysts say the IPO market isn't likely to recover its earlier buoyancy soon.

Last month, over 100 IPOs were projected for September, but now only 55 companies or so have filed with the

Securities and Exchange Commission

, and a mere 28 are set to go in October. Investment banks are waiting to see how the market looks in early September before rushing out pulled IPOs.

"It may take a couple months until the market really starts to soar," says

internet.com

analyst Tom Taulli. According to Taulli, the recovery window for IPOs may be short, since there's generally a "December doldrums" period for IPOs that lasts until February. "It could take until next year for some of the smaller deals to do better," Taulli says.

This time, however, concerns about the possible impact of Y2K disruptions may further scare off investors.

One strategy is for companies to temper their ambitions by cutting offering prices and reducing the number of shares offered. Last week,

bamboo.com

(BAMB)

and

ImageX.com

(IMGX)

went out, and their stocks soared on their debut. But that happened in part because both companies revised their offering prices lower. bamboo.com originally planned to offer 5 million shares at between $10 and $12, but ended up offering 4 million at $7. ImageX.com's original range was $12 to $14, but it also reduced its offering size by 1 million shares and was priced at $7. The upside: Both saw first-day pops (151% and 99%, respectively). The downside: bamboo.com raised $28 million, barely half of the expected $55 million, and ImageX.com raised $21 million, a fraction of the $52 million it had hoped to raise.

It was a sacrifice, but both companies made it out of the gate, and thanks to their early jump attracted much-needed publicity, which these days is just as important as the actual money raised. Other companies may follow the same strategy. "It's definitely a come-on to pique investor interest so that they feel like they're getting a better value for their investment," says Gail Bronson, senior analyst with

IPO Monitor

and founder of

InternetAssist Ventures

, a Silicon Valley venture catalyst firm.

If the game plan is to get out of the gate, then something has to give. "The proceeds in the offering might not be as high as they could be," says Randall Roth, an analyst with

Renaissance Capital's

(IPOSX)

IPO Aftermarket fund. "But on the other hand, there's such a thing as secondaries," says Roth.

The moral of the story: Get to first base first.