Underwriters who pinned their hopes for a revived new-issues market on the PayPal ( PYPL) IPO are probably wishing they'd chosen their candidate a little more carefully.

PayPal's deal was announced with much aplomb and anticipation after a barren year for technology offerings. The company sells a payment system for online transactions that is popular with users of eBay ( EBAY), and indeed, some speculate that the product's familiarity among potential investors further juiced demand for the shares.

But as fast as PayPal's reputation went up, its shares have plunged back to earth, victims of an ill-timed lawsuit, bare-knuckled competitive posturing by eBay and, according to some, haste on the part of deal-starved underwriters.

Checkered History

During a broad-based rally Monday, PayPal's shares fell below their $13 offering price for a second consecutive session, before rallying to close up 11 cents at $13.35.

"I was displeased Salomon Brothers brought the company public when it did," said David Menlow, president of IPOFinancial.com. "The issues were serious enough to merit some resolution."

Two days before PayPal was scheduled to go public on Feb. 6, rival software maker CertCo filed a patent infringement suit that caused a postponement of the pricing. A few days later, PayPal said Louisiana, California, New York and Idaho notified it that its payment system, which essentially collects deposits for online spending, might amount to an unauthorized banking business, further clouding the deal's prospects.

Menlow, who had been bullish on the stock prior to the revelations, changed his opinion before the debut. "If incorporated into an original prospectus, a risk disclosure statement can be a negative thing," Menlow said. "But it's not nearly as bad as an amendment two days before an IPO filing."

Despite the problems, PayPal soared $7.09 on its first day of trading to $20.09, leading some briefly to herald a renaissance for new technology shares.

But others said the deal was sold to a bunch of PayPal fans whose enthusiasm was based on something other than the company's financial viability. "There could have had a bunch of people who used PayPal and thought it was the greatest thing since sliced bread," said Marc Baum, chief executive of IPO.com. "And, so, they bought the stock."

Whatever the reason for the pop, the shares deflated last week when eBay announced it was paying Wells Fargo ( WFC) $43.5 million to buy back the 35% of its Billpoint online payment service it didn't already own. The agreement was seen as a hostile gesture aimed squarely at eBay's competition, and it knocked PayPal's shares from a close of $17.82 Wednesday to $15.01 Thursday and to $13.21 on Friday, the first session during which it dipped below $13 intraday.

Vacuum Abhorred

The media hype surrounding this offer, the first Internet IPO of the year, was substantial. "At the beginning of January, I called it the IPO of the quarter on the radio," said Menlow.

With only 19 initial public offerings filed this year, hot deals have become a rarity. "The heyday of 20 deals a week is gone," said Jeffrey Hirschkorn, an analyst at World Financial Group. "People thought this one would do better than it did, and they got bitten in the rump."

"PayPal could have ended up in retail hands that weren't paying attention to the news," said Baum. "Or, investors could have come off the sidelines to make money off the pop."

And the questions linger. Said Hirschkorn: "When PayPal comes out of its quiet period, it is going to be interesting to hear what the underwriters have to say."

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