Europe sours on Net IPOs
September 28, 1999: 11:40 a.m. ET
High-flying stocks sink below issue prices as investors grow choosier
By Staff Writer Douglas Herbert
LONDON (CNNfn) - Hear that hissing noise? That's the sound of deflating price premiums for Europe's biggest Internet IPOs as investors begin to have second thoughts about the standing ovation they gave the sector just two months ago.
The warm reception Net IPOs still get on Wall Street -- a recent e-commerce startup rocketed to a 173 percent premium last week -- is finding little resonance on Europe's fidgety bourses these days.
The leap-of-cyber-faith that heralded Europe's embrace of Net-oriented public offerings during the summer is giving way to a cooler, more discerning climate, analysts say.
Nagging interest rate and liquidity worries, coupled with a scarcity of venture capital, have added to the uncertainty afflicting the sector.
"You have very volatile markets with increasing risk," said Gary Dugan, an equity strategist with J.P. Morgan in London. "It all self feeds. Once one (IPO) collapses you find it difficult to price other deals
A few months ago it was all about analysts trying to find the highest valuation for Internet stocks, and now the game is about finding the lowest valuation."
Only two of the 12 Internet-related companies to go public in Europe since June still are trading above the lofty prices they achieved in their inaugural trading session, according to Miles Saltiel, a technology analyst with broker WestLB Panmure in London. The rest have fallen as investors puzzle over how much the companies are actually worth and when, if ever, they'll make a profit.
Freeserve's flagging fortunes
Few firms exemplify the reversal of fortune more vividly than Freeserve, the pacesetting U.K. Internet company that was 30 times oversubscribed when electronics retailer Dixons launched it amid great hoopla on the London Stock Exchange July 26.
Since then, Freeserve has sunk below its launch price of 150 pence. Tuesday in London, its shares were down almost 11 percent at 134 pence after the company disclosed a hefty loss in its first earnings announcement since the listing.
The cumulative damage is even greater: Freeserve has tumbled more than 46 percent from its peak this year, while another one-time high-tech high flyer, eXchange Holdings, listed in August at 200 pence, has slumped more than 32 percent from its peak. On Tuesday, the shares were off 3 percent at 165 pence.
Meanwhile, QXL.com, an online auctioneer with 2.5 million pounds in revenue last year, has slashed the target price for its planned public sale in response to the sector's doldrums. Yet another IPO wannabe -- buy.co.uk, which advises consumers on best values for cutting household bills -- is holding off on its listing until next year.
Nor are the setbacks limited to Britain or the Internet sector.
On Frankfurt's Neuer Markt, a cutting-edge index that offers a trading niche for 150 high-growth stocks, several planned launches have been postponed in recent weeks amid concerns of a pending liquidity squeeze. In Spain, Telefonica is waiting until at least November to list a minority stake of its interactive arm in Madrid and New York.
IPO pain universally felt
International metals trader, MG PLC, spun off from German industrial group Metallgesellschaft AG, slipped 10 percent below its 205 pence issue price in London earlier this month. On the same day, Regus, a global provider of office services, scrapped plans for an IPO this year. Instead, the company said it will use a 100 million pound debt facility to fund its growth plans.
Analysts attributed MG's lackluster debut to wariness over potential earnings volatility and the dearth of similar listed companies that could serve as a benchmark for comparison. Regus withdrew its IPO just days before it was set to divulge details of the listing. The company's chief executive, Mark Dixon, reportedly was uneasy about taking the company to market before it had completed a planned expansion.
To avoid disappointment, some banks reportedly have been urging clients to go ahead and list, though at more "realistic" prices that reflect the market's greater skepticism.
But for companies thirsty for capital to fund their ambitious visions, such advice may leave them feeling limp, some analysts believe.
"I wouldn't be surprised if we were now to see the other side of the equation: that is, these companies raising money in other ways than coming to the City (London's financial district)," George O'Connor, a tech analyst at broker Granville in London, told CNNfn last week.
Saltiel portrays the current downturn as a by-product of the investor queasiness that periodically settles over the marketplace.
"We are, and have been for some months, in a climate in which interest rate expectations in the U.K. and in the United States are on the up, and that has caused
a climate of opinion on the part of investors where they go from seeing the glass half full to seeing the glass half empty. Interest rate rises will move up, but there will come a time when the expectations have reached the top."
Saltiel and others say European Net investors are becoming more selective as they sniff out fundamental flaws in companies they would have given the benefit of the doubt a year ago.
"Investors are at this point being discriminating in their approach toward IPOs, and more hesitant toward Internet IPOs," Saltiel said. He noted a shift in favorable sentiment, especially in the German market, toward stocks with media content. "That seems to be the current flavor. Internet markets are capable of being more or less discriminating. But they've always been to some extent driven by fashion."
What this bodes for the immediate future of IPOs is an open question. Jerry Evans, an equity strategist at Enskilda Securities, believes that a company with a sound strategy and a solid bottom line will be able to weather the mercurial moods of IPO investors.
"In the short term, a lot of companies have had disastrous openings and then you've got to work your way out," he said. "A good company will always pull through. If something's really good they'll shine through."
In the current IPO market, the "shiners" have been those Internet companies that sell products from business-to-business, rather than from business-to-consumer. In the last three months, three such e-commerce start-ups, JSB.com, Kewill.com and Baltimore.com, have outperformed the London Stock Exchange by around 60 percent.