IPO Pipeline Filling, but When Does the Spigot Get Turned On?

There are a bunch of initial public offerings waiting to be priced, but don't expect a repeat performance of 2000.
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Few things are clear about how the

IPO market will perform this year.

That is, if there's even an IPO market to speak of -- because right now it's looking as dead as roadkill on a wooded highway.

When it picks up again rests heavily on the

Nasdaq Composite Index's

near-term reaction to the

Fed's surprise interest-rate cut last week. But uncertainty abounds over which sectors will enjoy the most successful deals when IPOs get going again.

What

is

clear is that when the IPO market revives, investors aren't going to see the same kind of rush to market they saw in March or August 2000. Firecracker first-day gains -- of the 100% to 500% variety -- likely will be scarce, if not entirely absent, this year. Bankers and investors, therefore, are expected to avoid the smaller, untested companies for larger, more established ones with proven cash flow -- that means fewer but bigger deals.

"This year, it's going to be a wait-and-see scenario," said Yusuf Haque, tech IPO analyst for financial analysis and media company

123Jump.com

. "Investors are no longer willing to take bets on unproven technologies. The market is no longer going to gamble."

During 2000, the IPO market bubble ended with a thud. Until the spring, IPOs promised waterfalls of quick riches -- and usually delivered. But, as the first signs of a slowing economy surfaced, investors began to realize that the highly popular tech sector could not go up forever. The tech-tracking Nasdaq tumbled and the IPO market went with it.

The earliest the IPO market could get going again is February, say analysts. The roadshows that typically precede an IPO are suspended over the holidays and usually take a few weeks to get going again. Plus, it's not yet clear what midterm effects the interest-rate cut will have on the Nasdaq -- the bloodlife of the IPO market. On Wednesday, the Fed dropped the federal funds target rate by 50 basis points, to 6%. The rate cut inspired investor optimism about an imminent recovery of the slowing economy and stocks rallied euphorically. But the positive effects of the rate cut probably won't trickle into corporate earnings for a while.

Whenever it comes back, the IPO market should get off to a slow start -- no bang of backlogged deals like the market saw last August. That month, a bounce in tech stocks sparked a rush of IPO offerings that had been suspended since March's market plunge. But shortly after, the offerings spigot turned off.

It's not that there isn't backlog now. In fact, there are a total of 139 deals still on file that have been suspended over the last six months, according to New York-based investment research firm

CommScann

. But many of these deals simply won't get done.

"There aren't a whole lot of IPOs that look ready to come out. They are being stalled at the launchpad much longer," said George Nichols, IPO and Internet analyst at

Morningstar

.

With investors less willing to gamble on market momentum, the heady opening pops that the market saw this spring are not expected to return either.

"I don't anticipate this year's record 500% opening pop being met for years, if ever," said Nichols.

What and Where

So, what kinds of deals are we talking about? It's probably no surprise that the outlook is a bit conservative. Think big, reliable and profitable.

"Quality deals are going to have a shot at getting done. But without strong management, a strong business plan and a clear path to profitability, an IPO is no longer a realistic expectation," said Doug Woodcock, head of equity capital markets at

D.A. Davidson

. "Clear path to profitability is the new, old thing."

Bigger is better for underwriters, anyway, when they're operating in a more thinly populated IPO universe -- the bigger deals allow them to make up for underwriting fees lost on a lower volume of smaller deals, according to Nichols. This should also mean a rush of mergers and acquisitions as the smaller fry turn to alternate sources of financing.

Analysts were mixed on which sectors will be most popular when the IPO market returns. Several said that biotech, alternative energy and tech and communications companies would be best poised to make a comeback since they weathered the IPO market's pain in the fourth quarter of 2000 and only recently fell out of favor.

Then again, biotech companies burn a lot of cash, which is not appealing to today's more cautious IPO investors, said Nichols. Biotech companies burn cash as they do research to develop the next blockbuster drugs.

Analysts also differed on the fate of fiber optics' IPOs, which were hot over the summer and through August. Woodcock acknowledged that investors are put off by the recent downturn in stocks in this sector. But there is still a ton of venture capital funding in opticals and a "fundamental need for this technology to drive faster data and transmission and faster networks."

But too many questions about slowing capital expenditures from big communications companies remain, Haque maintained. Several telcos have warned of slowing capital spending in recent months.

It's a cloudy horizon and a less sexy sport, but there's still plenty of money to be made in the IPO game.