The IPO's Not the End of the Road

Cramer looks at the typical Net company IPO strategy and predicts that 1999 will bring difficult times for many in the sector.
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OK, so I am at the circus with my kids Sunday and a guy I never saw before comes up to me with a business card in his hand, and next thing you know he's telling me to watch the big IPO in the first quarter. And as I put his card in my shirt pocket and try to refocus on the clowns in the ring, I think to myself, Holy cow, which is more important, the company or the IPO? (Or, as my kids quickly reminded me, the circus itself!)

And then it hits me -- what an anachronism I have become! In the new world, the IPO is the goal. It is the end of the rainbow. Once the IPO is booked, the company's game plan is complete, and whatever happens after is largely, well, secondary.

Amazing, but who can disagree with this new life cycle? Isn't that what

Amazon

(AMZN) - Get Report

turned out to be? If Amazon hadn't tapped the public markets effectively, would it be in business now? Wouldn't it just have run out of money? But it made it to the IPO, and the rest was history.

Before the Net, the IPO was simply a stage -- an important stage, but not the ultimate stage, of a company's growth. Very few of the companies that trade publicly would not be companies if there were no stock market. These companies would find financing somewhere else. They would

exist

.

But would Net companies? Could these companies go to a bank, say, and get capital? Could they issue debt and expect people to buy it? Some would, but most wouldn't be able to, I suspect. In fact, I think many of these companies are companies

because

of the way the stock market rewards e-commerce. Most of these companies are just rarefied press releases backed by cheap public capital.

Which is why 1999 will be the shakeout year for the Net, because the notion of the IPO being the end of the road is a joke. None of these companies coming public is raising a lot of money on the IPO. The number of shares being offered is small, just small enough to keep a squeeze going or to allow a company's float to be dominated by a few accounts.

When the companies run out of money -- and many of them will because they have little financial discipline -- the possibilities of tapping the secondary market seems almost inconceivable. And when the insiders start unloading, you will see more Net stock float than even the e-traders and the mutual funds can put away.

The slight of hand of "small offering, big restricted stock pool behind it" unravels when the restricted reservoir turns into an unrestricted stock flood. From the looks of the lockups and the dwindling cash balances, we will see the unraveling this year. And the notion that IPO is the win will disappear with the sobering reality that the Net did not repeal the business risk of being a business. It just masked that risk incredibly effectively in an electric blanket of rosy press releases.

In 1999, the blanket short-circuits. The winners will be companies that actually have a chance of making money before the money runs out. The losers? Everybody else that had a big IPO payday.