Articles of Interest

Losers Outpace Gainers in IPO Market by Margin of 2-1
The Wall Street Journal
Monday, December 4, 2000
by Raymond Hennessey

No hand recount is needed here: By a ratio of more than 2-to-1, IPO losers are outpacing the gainers in 2000.

Chances are that an investor who bought a company's shares at its initial-public-offering price this year, and held them, has lost a good deal of money. Through last week, there had been 439 new offerings, and 304, or 70%, were trading below their offering prices, according to Thomson Financial Securities Data. Only 110 are above the offering prices. (The other 25 are either flat or are of companies that were bought.)

It's a far cry from 1999, when just 20%, or 106, of the 543 IPOs fell below their offering prices by year end. It was the kind of year that made investors fall in love again with IPOs.

The figures are the latest reminder of how unsettled the U.S. stock market has become, particularly those young technology companies on the Nasdaq Stock Market. Last year, Nasdaq - where most IPOs make their debuts - roared to historic gains. But this year, stocks have been punished, partly because of earnings slow-downs. And many young companies have either seen their IPOs struggle or have put off going public altogether.

Many companies have seen their valuations disintegrate just months after completing flashy IPOs. The most high-profile so far this year has been Pets.com Inc., San Francisco, which went public in February at $11 a share, only to announce Nov. 7 that it was winding up operations. It trades on Nasdaq at 28 cents a share.

First-day fireworks for IPOs are no guarantee of long-term strength, clearly. Of the top 10 best first-day performers this year, six of them trade below their offering price. Electronic-commerce software company Selectica Inc., San Jose, Calif., rose 371% above its $30 offering price in its Nasdaq debut March 10, making it the fourth-best debut this year. Selectica's shares closed Friday at $19.31, 36% below the offering price.

AsiaInfo Holdings Inc., a Chinese Internet company based in Beijing, ended 315% above its $24 offering price March 3, for the sixth-best first-day rise in 2000. The stock, with trading symbol ASIA, ended Friday on the Nasdaq at $9.25, or 61% below its offering price.

Even the biggest first-day gainer this year, webMethods Inc., has seen much of its pop erode over the past few months. The Fairfax, Va., software company ended its first day in February at 508% above the $35 offering price, and the continued climbing past $300. At $68.25 on the Nasdaq Friday it was still well above its offering price, but also well off its highs.

These steep drops make Wall Street underwriters' jobs a bit trickier in the coming weeks. Investors often aren't comfortable taking a chance on a new stock unless the potential rewards far outweigh the risks. In most of 1999, for example, investors felt comfortable buying recently formed companies still three or four years away from profitability because the public markets were valuing these so high they were almost guaranteed to see their investments soar within days.

With this year's more tame valuations, investors have been far more skeptical and insistent that the prices they pay for IPOs are as low as they can be.

Take last week. Rigel Pharmaceuticals Inc., a drug maker in South San Francisco, was the only company to make it to market, and it priced its offering far lower than it had expected. In the end, Rigel raised just $35 million before underwriting fees, a fraction of the $100 million it had originally hoped for. Morgan Stanley Dean Witter led the offering, which has ticked ahead 5% in its first three days of trading.

Underwriters hasten to point out one bright spot in IPO performance this year: It's still a lot better than that of the broader markets. All the major U.S. stock indexes are down for the year, but the worst performer, the Nasdaq Composite Index; is the one most important to IPOs. The tech-stock-heavy Nasdaq composite is seen as the best barometer for the tech-heavy IPO pipeline.

But while the Nasdaq composite is down 35% for the year, IPOs on average are off 22% from the offering prices.

"It's all relative," said Paul Grangaard, director of investment banking at U.S. Bancorp Piper Jaffray in Minneapolis. "Even though [IPOs] are down as a group, they're a lot better than investing in, say, the Nasdaq composite."

Also, few, if any, investors actually buy and hold IPOs. Particularly with the big first-day gainers early in the year, many investors most likely took profits early, before valuations start to fall. Those investors who simply flipped their shares - buying them at the offering price, then selling them quickly once initial trading opened - have felt no pain this year. Also, investors generally should have a more diverse portfolio, and good portfolio managers who pick and choose their IPOs, rather than simply buying all comers, can find a way to do well, even in this environment, Mr. Grangaard said.

"Any investor who buys IPOs all year long is not doing very intelligent investing," he said. "That's what a lot of day traders have learned this year."

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