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Brokerage leads week's IPOs
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March 30, 1998: 2:19 p.m. ET
New offerings lack high-tech gloss, but there are more are in the pipeline
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NEW YORK (CNNfn) - Investors hoping to reap Hollywood-style rewards from blockbuster performance on Wall Street were disappointed last week, but new offerings staged a comeback and had their best aftermarket week so far this year.
Not only did the Russell 2000 index of small cap stocks edge up slightly in a week when the Dow Jones industrial average lost 110.35 points -- 1.24 percent of its total value -- but initial offerings jumped 25 percent on average, led by a rally among sleeper hits in the Internet sector.
ISS Group (ISSX), the latest Internet darling to go public, opened at 38-1/2 last week, adding nearly 300 percent to original filing price of $10. However, by the time ISS got to the market, demand had boosted its final offering price to $22, the largest percentage change between filing and offering prices this decade.
Speculators don't often look at valuations in the Internet sector, where price-to-earnings multiples quickly rise toward infinity. ISS falls into this category, but the company's price-to-sales multiple, based on current capitalization of $600 million, is a somewhat more reasonable 44.
Other recently offered Internet companies that aren't expected to post a profit for a while include Verisign (VRSN) -- the year's top-performing IPO -- and Amazon.com (AMZN), neither of which is expected to have a profitable year before 2000. IPO star Doubleclick (DCLK) is forecast to have negative results through 1999. Even companies like Yahoo! (YHOO) often take a year or longer to deliver profits.
Fortunately for these companies' offerings, investment bankers are happy to accommodate. Already 17 Internet-related initial and secondary offerings are in the pipeline waiting to light up the Street. If these deals get anywhere near the attention the past few Internet offerings have gotten, it's safe to assume the $500 million that this batch is expected to raise might be a bit conservative.
Wall Street's infatuation with Internet IPOs is deepening as the Internet sector expands. Investors already have poured $1.3 billion into newly-minted Internet stocks, nearly double the figure for the same period a year ago and triple that raised two years ago.
However, investors hoping to get in on the ground floor of some fresh Internet offerings will have to wait until next week. This week's relatively small float of 12 issues valued at $836 million lacks the high-tech spice the market has come to expect recently.
One of this week's biggest deals comes from the brokerage and investment banking sector. Interest in the industry is being driven by merger speculation, record-setting markets and solid earnings results, all of which should help generate more capital for regional brokerage firm Freedom Securities.
Freedom hopes to raise $120 million with its expected $18 offering, at which price it would trade at an earnings multiple of 14 compared with an industry average of 17.5. Even after the standard 15 percent IPO discount, Freedom's Donaldson, Lufkin & Jenrette-led IPO appears undervalued on this basis alone.
Although one could argue that Freedom should trade lower than its peers because its main revenue comes almost entirely from brokerage commissions, those commissions can add up to quite a bundle in a market where volumes have grown 22 percent compounded annually over the last five years.
At the moment, Freedom can ride this cyclical upturn as profitably as Friedman Billings Ramsey (FBG), another regional securities firm that recently went public and is itself ranked top IPO underwriter for the year by Securities Data.
Friedman's seven IPOs this year have raised a total of $643 million, already a third of the capital brought in by all 1997 Friedman-led offerings. Three of those seven were real estate investment trusts, so it's not surprising that this week's sole REIT -- Wilshire Real Estate Investment Trust, slated to raise $150 million -- will be underwritten by Friedman.
Ecuador's only digital wireless service provider, Concorcio Ecuatoriano de Telecommunicaciones or Conecel, plans to raise $133 million this week with its $14.50 debut jointly coordinated by UBS Securities and SBC Warburg Dillon Read. Conecel has two cellular licenses until 2008, when Ecuadorian government has the option to renew the contract for another 15 years.
Other deals to watch for this week: a $90 million offering by Omega Protein, Horizon Offshore's $65 million debut, and Frisby Technologies' $11.2 million float. 
-- by Bambi Francisco for CNNfn Interactive
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