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Tech no! We don't want to IPO!
Investors have shunned tech initial public offerings this year. When will the drought end?
June 23, 2005: 3:38 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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Open up the tech IPO box and you'll find....very little to get excited about. Nothing like Google is waiting in the wings.
Open up the tech IPO box and you'll find....very little to get excited about. Nothing like Google is waiting in the wings.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER
Better off private?
Several tech IPOs have flopped.
Company Description Change* 
Odimo Internet jewelry retailer -41.6% 
Fusion Telecom. VoIP services -26.5% 
Fastclick Internet advertising -26.1% 
FTD Group Online flower retailer -16.3% 
optionsXpress Holdings Online brokerage -13.9% 
Fairpoint Comm. Telecom services -11.9% 
Syniverse Holdings Wireless networking services -11.7% 
 * from offering price as of 6/22
 Source:  IPO Monitor

NEW YORK (CNN/Money) – Summer is officially here. And the market for initial public offerings, like the temperature, has started to heat up lately.

Inergy Holdings (Research), a propane distribution company, went public Tuesday and the stock rose nearly 24 percent in its debut. Allion Healthcare (Research), a provider of pharmacy and disease management services for HIV/AIDS patients, went public Wednesday and the stock surged 27 percent.

Another new offering hit the market this week but didn't fare as well. Builders FirstSource (Research), which makes roofs, floor trusses, stairs and other products for home builders, dipped 3.5 percent on Wednesday. And two more companies went public on Thursday, shipping firm Eagle Bulk Shipping (Research) and for-profit education firm Lincoln Educational Services (Research).

It's a good sign that deals are starting to make it to the market again. But what do all these offerings have in common? There's not one tech company in sight. In fact, that's been the story for the IPO market all year. Very few tech firms have gone public.

IPO window is shut tight for tech

"The silence has been deafening. Usually, tech drowns out everything else but now the IPO market is a place where investors don't like to take a risk," said Tom Taulli, co-founder of Current Offerings, an independent research firm focusing on IPOs.

And a look at the upcoming calendar shows a continuation of this trend. During the next few weeks, only two tech firms are tentatively set to debut, software firm Kenexa and Taiwanese chip firm Silicon Motion Technology.

Meanwhile, the IPO pipeline is chock full of companies from more traditional sectors like consumer goods (shoe store DSW and sports apparel maker Volcom), financial services (KKR Financial and Western Alliance) and even more shipping firms (TBS International and Capital Maritime).

What's happened? Investors seem to have lost their appetite for more speculative offerings and instead prefer companies in businesses that are financially sound and easier to understand. As a result, many small tech firms, which are often unprofitable, realize that it is unwise to test the public waters now.

"The tech IPO market is struggling a little bit. Investors are hesitant to invest in a lot of things that they are seeing since the market now is very fundamentally focused," said Tim Walsh, managing director and head of technology banking for Lane Berry, a Boston-based investment bank. "The IPO window is pretty shut for all but the most well managed companies with great prospects."

And the problem is that there does not appear to be many companies fitting this bill. Unlike last year, there is no Google (Research) waiting in the wings.

"There's nothing out there in tech. It's so dry that it's not funny," said Ben Holmes, managing partner of Protege Funds, a hedge fund that specializes in IPO investing.

Some candidates wait in the wings...

Still, Taulli thinks there is some hope for the future. He says some private tech companies could file for offerings this summer and would have a reasonable chance of doing well as public firms.

His wish list includes Elance, a developer of software that helps companies manage outsourcing services, and MFORMA and Glu Mobile, two firms that make downloadable video games for cell phones. The wireless gaming market is particularly hot right now, as evidenced by the strong stock performance of JAMDAT Mobile (Research) lately. (For more about JAMDAT and wireless games, click here.)

Taulli adds that eHarmony.com, an online dating site, could be a hit if it files to go public. The company has decent name recognition since it advertises frequently on TV. eHarmony.com also raised more than $110 million in financing last year from two prominent venture capital firms – Sequoia Capital and Technology Crossover Ventures.

Finally, there's Vonage, the leading provider of Internet phone services, a technology known as voice over Internet protocol, or VoIP.

Taulli says that he's unsure if Vonage has what it takes to succeed in the long-term since telecom is such a highly competitive business. But he said that an offering from Vonage would, at the very least, provide some much-needed sizzle.

"Vonage doesn't lack buzz so it would be great to have a Vonage IPO. It would be something for people to talk about," Taulli said.

But it's unlikely that Vonage would attract the type of hype that Google did. What's more, even Google's success -- the stock is up nearly 250 percent since it went public last August -- didn't usher in a new era of tech offerings. So the tech IPO drought could last for awhile.

"People were hoping that Google would open up all sorts of things for tech IPOs. But if Google didn't do it, I don't know what could," said John Meeks, principal with TA Associates, a Boston-based buyout firm.

...but quality companies may sell out instead

Walsh thinks many promising tech upstarts may never make it to the public market because they are finding that it might make more sense to sell out to a larger rival or private equity firm than go it alone.

"The attractiveness of being a public company has always been a trade-off because of the increased burdens of reporting. And it's only gotten worse with Sarbanes-Oxley imposing high costs on young companies," Walsh said. "So the M&A route is much more interesting."

To that end, several private companies that were thought to be promising IPO candidates this year have already cashed in by selling out.

Wireless messaging company Lightsurf was acquired by Verisign (Research). eBay (Research) bought apartment listings site Rent.com. Anti-virus firm Sybari Software was scooped up by Microsoft (Research). Most recently, newspaper publisher E.W. Scripps (Research) bought comparison shopping site Shopzilla.

And as long as established firms are willing to spend on private companies, venture capitalists are likely to keep chasing that money rather than take the risk of bringing firms public.

"There is no question that the IPO market has been sputtering, particularly in tech. So most VCs do view buyouts as the more likely exit strategy," said Bob Gold, president and CEO of Ridgewood Capital, a venture capital firm based in Ridgewood, NJ.

For more IPO news, click here.

Can Google crack $300? Click here to find out.


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