Internet TKO: Net IPO Mania's on the Ropes After 2 First-Day Declines

ZipLink and Juno close lower in their first day of trading, marking the Net's first such daily double.
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The Internet IPO frenzy died Wednesday.

Two of the five Internet IPOs that began trading Wednesday,

Juno Online

(JWEB:Nasdaq) and

ZipLink

(ZIPL:Nasdaq), fell 11% and 12%, respectively, from their initial prices. Another,

Edgar Online

(EDGR:Nasdaq), inched fractionally higher after spending much of the day below its 9 1/2 initial pricing.

The pullback marked the first time two or more Internet IPOs closed below their initial prices on their first trading day. Of 165 previous Internet IPOs since 1990, only seven closed below their initial prices. The last one to do so was

Comps.com

(CDOT)

, which closed at 14 1/4 on May 6 after it was priced the day before at 15.

There were also two strong Internet IPOs Wednesday:

StarMedia Network

(STRM:Nasdaq), which climbed 73% to close at 26 after being priced at 15, and

DLJdirect

(DIR:NYSE), which added 51% to end at 30 1/8. But even those gains pale compared with some recent Internet IPO success stories, such as

theglobe.com

(TGLO)

, which rose 606% when it began trading on Nov. 12, and

CBS MarketWatch.com

(MKTW)

, which soared 474% its first day of trading, Jan. 15.

The notable day came on the heels of a harsh

reception Tuesday to the highly anticipated

barnesandnoble.com

(BNBN:Nasdaq) IPO, which rose just 27% on its first trading day, far below the average 114% first-day gain Net IPOs had enjoyed in the year to date.

The mixed reaction to Wednesday's Net IPO slate, which was presaged by Internet stocks' recent retreat (

TheStreet.com Internet Sector

is about a third off its 52-week high), was reverberating beyond Wednesday's newly public companies. Wall Street's IPO pipeline is stuffed to record levels with new Internet offerings, and now many may end up postponed. In addition, the market has turned much less tolerant of weak companies trying to come public.

"Everyone's pipeline is full," says one Wall Street underwriter who requested anonymity. "If the market slows significantly over the summer, I think it is going to cause problems."

A total of 92 Internet IPOs have been filed since March, including 35 filed in May alone, says

Thomson Financial Securities Data

market strategist Richard Peterson. That adds to the 59 Internet IPOs that have been priced so far this year.

"There is going to be a push to get deals out the door before Memorial Day," the underwriter says.

It may already be too late. Issuance will definitely slow as Internet companies become a little more circumspect, especially if they can no longer get the reception they've been banking on, says Richard Smith, who heads the equity syndicate desk at

BancAmerica Securities

, formerly

NationsBanc Montgomery

. "The pendulum is going to swing in the other direction on these deals, and as the pendulum always does, it is going to swing too far," he says.

The dud opening of a handful of Net IPOs was bound to happen because the market had been flooded for so long with so many Net deals that investors simply couldn't keep up. This rising supply finally led to a growing selectivity among investors.

"Investors are learning not all IPOs are the same," says Smith. That was evident Wednesday, when companies such as Juno, whose prospects are perceived as less promising, fell, while companies with stronger prospects, such as DLJdirect, climbed.

So some Wall Street bankers say that all the gloom of the past few days is merely a return to the normalcy. Now, Internet issues may well perform more in line with the non-Net IPOs. (The market for non-Net IPOs has been eclipsed for most of the year as investors

spurned even some big-name deals, such as

Pepsi Bottling Group

(PBG)

, in part because they were interested in looking only at the Net stocks.)

"This is healthy, because that other stuff was bananas," says Smith.

However, many bankers also admit that for an IPO market that has taken nosebleed first-day runs as a birthright, a return to more traditional market performance looks pretty much the same as the end of the party.

"The emotion and psychology of this sector was so far out over its skis," says David Weir, co-head of technology investment banking for

J.P. Morgan

. (Morgan was co-manager on StarMedia's IPO.) Investors were willing to take a "devil's bet" on Internet IPOs, accepting weak revenue and big losses in exchange for explosive growth projections. That led to huge first-day gains in IPOs such as theglobe.com and

priceline.com

(PCLN)

.

Some people say it's too soon to call an end to Internet IPO mania. Brian Bean, an investment banker with

BancBoston Robertson Stephens

, says it may take more than two days of cool receptions for an official death certificate. (Robbie Stephens also was a co-manager on StarMedia.)

"I think we'd like to say, the temperature is the same as it was 10 days ago," Bean says. "But I'm not sure that's still actually true." Tech stocks need to slip for a few more weeks before companies start reconsidering, Bean says. The first deals to be shelved might be follow-on stock offerings by public companies, which might decide they can afford to wait and raise money at better prices.

It is hard to delay an IPO because going public is such a formative event. IPOs also can tolerate slightly lower prices. Still, if the market keeps sliding, Bean says he might recommend that his clients wait.

Staff reporter Kevin Petrie contributed to this story.