Internet IPOs: Hot for '99
Software for customer management, production likely to shine, too
NEW YORK (CNNfn) - The last year of the 20th century will be the year of the rabbit, the year global economic growth is expected to slow to a crawl, the year set to begin under a cloud of political paralysis -- but what will 1999 usher in for IPOs?
If past is prologue, then one prevailing theme unquestionably will carry over into next year, at least early on: Offerings by Internet companies will continue to proliferate. Of the 178 IPOs in the pipeline, 21 are Internet-related.
"I think the best predictor is the immediate past," said Roger McNamee, partner at Integral Capital Partners, a venture capital firm. He is echoed by other IPO analysts and strategists, who foresee the "continuation of Internet IPO mania that we've seen over the past couple of months."
As a venture capitalist, McNamee is in a position to know what deals may be in the incubation stage and ready to hit the public arena soon. His prescient call on the best performing IPO this year, eBay (EBAY), is all the more reason to note his observations.
What'll be hot
McNamee believes there will be "two kinds of IPO deals" to watch for in 1999: online IPOs -- retail brokers now refer to all these stocks as "dot-com offerings" -- and, outside the Internet realm, IPOs that have been ready to go public for some time and have a proven track record as opposed to an open window of opportunity, said McNamee.
He particularly likes enterprise software companies that make software to optimize manufacturing and relations management with customers.
McNamee's list of prospective hot IPOs include some that may file in the future and some that already have filed, such as EXE Technologies. This Goldman Sachs-led deal makes software solutions that facilitate operations of warehouses or distribution centers; for instance, it allows companies to improve inventory turnover and product deliveries.
Along the same "optimizing" theme are McNamee's other picks, which also were listed among Red Herring's "50 Best Private Companies in 1998": Calico Technology and Pivotal Software. Both address the growing need to reduce marketing and sales costs while maintaining maximum efficiency in targeting and servicing clients.
Calico makes eBusiness or eSales software that focuses on optimizing e-commerce solutions for businesses. Pivotal Software, which boasts a fast-growing international customer base of 355, makes software that focuses on customer-relationship management
Big names, big spin-offs
While the '90s version of biotech-mania likely will bring splash to 1999, spin-offs of large, seasoned companies will deliver size though they may not outgun the historic precedents set by the hefty deals of 1998.
This past October, DuPont's (DD) spin-off of its vertically integrated oil and gas unit, Conoco (COC), became the biggest domestic offering ever at $4.4 billion. Alstom (ALS), a power generation equipment maker, was a $3.7 billion IPO spin-off by GEC and Alcatel (ALA). In the media industry, Rupert Murdoch's News Corp. (NWS) made headlines with its $2.8 billion IPO of Fox Entertainment Group (FOX). That was followed later by CBS' (CBS) similarly sized IPO spin-off for Infinity Broadcasting (INF).
While many of these issues came public in the latter half of 1998, the new year doesn't appear to have "many blockbuster deals on the horizon," says Randall Roth, Renaissance Capital analyst.
Delphi Automotive Systems' $1.5 billion offering is the largest in the pipeline. Delphi, the world's largest automotive parts supplier, is a subsidiary of General Motors (GM). Another spin-off to watch for is United Pan-Europe Communications, from United International Holding's cable-based telecom network in Europe. Goldman Sachs is expected to take the lead on that offering.
Which raises the question of whether 1999 will be the year Goldman Sachs itself finally goes public. But there are many hurdles to consider. For one, a whole set of new partners would have to vote on an IPO, and market conditions might not favor financial stocks. Also dependent on the market is the expected offering of Mario Gabelli's investment management holding company, Gabelli Asset Management. It's expected to raise $105 million when it goes public in late February.
Rumors that General Electric (GE) will spin off NBC as a separate company have been denied by GE Chairman Jack Welch, but Welch did say that GE may spin off some of its Internet assets. Given the GE brand name and dot-com fever, such an offering could mark the start of a new trend: big companies spinning off Internet units. It's a play on the consolidation within the industry as well.
"In 1999, we'll see more consolidation activity as leaders gain more scale," says Ryan Jacob, who runs the Internet Fund.
What meteoric valuations have wrought
Ballooning market caps and valuations that broke through the ozone layer were the norm toward the end of 1998. Extraordinary first-day openings such as that of theglobe.com (TGLO) -- its first printed trade of $59 was 556 percent above its $9 offering price -- ushered in an era of bewilderment and near amusement. The untenable levels had as much to do with scarcity value -- in other words, very little float -- as with online trading's coming of age.
"Big pops relate as much to day-traders and flippers" said Gail Bronson, a Silicon Valley start-up executive and senior analyst at IPO Monitor. Bronson, who refers to such traders as "Internet-stock jocks riding their computers," says this trend will go on "unabated" in 1999 "until the next game comes around."
But while online trading has given rise to volatile first-day and after-market performances for Internet IPOs, Tom Taulli, who writes The Taulli Report on IPOs, says it also has enabled "individual investors to have a huge impact on IPOs." He refers to E-trade and Wit Capital as companies that have spawned interest among smaller investors to "get a piece of" the IPO action.
And get they did, as the prevalent gold-rush mentality ran full throttle by mid-November when EarthWeb (EWBX) made its heaven-on-earth appearance to radically change investors' perception about IPOs.
A glance back and a look ahead
Since 1995, each year has brought forth a "first-mover" in the world of the Internet. The first Web browser, Netscape Communications (NSCP), came in 1995. In 1996 came the emergence of search engines like Yahoo! (YHOO)and Lycos (LCOS). In 1997, the first e-commerce company, Amazon.com (AMZN) went public. And in 1998, a flood of new e-commerce companies such as eBay (EBAY) came to market as did community sites GeoCities (GCTY) and Xoom.com (XMCM).
For 1999, Taulli sees Web financing companies as a new entrant, including companies that provide home mortgages such as homeshark.com, the anchor partner for Infoseek's (SEEK) new Real Estate Loan Center. Bronson and McNamee both see more e-commerce deals lighting up the IPO calendar.
Among the Internet companies that have filed: iVillage, a community Web site for women, is expected to go public in February. It generated $9.1 million for the first nine months of '98 and lost $32.4 million. As of October, iVillage had more than 700,000 unique members as it added about 60,000 members each month since January of last year. That's still quite small, however, compared with theglobe.com's 1.7 million members and GeoCities' 2.1 million members.
Another Internet IPO hopeful is Vignette, a provider of Internet relationship management software products and services that help businesses increase Web-based generated revenues. For the nine months ended September, Vignette had $9.5 million in revenues and $16.2 million in losses.
-- by staff writer Bambi Francisco