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IPO size doesn't matter
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June 28, 2000: 8:20 p.m. ET
Investors shun Genuity's $1.9 billion debut, stock falls below offering price
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NEW YORK (CNNfn) - Internet pioneer Genuity Inc., the massive initial public offering from GTE Corp., fell below its offer price Wednesday as the issue's large size continued to dampen investor interest.
Genuity shares fell 1-19/32, or 14.5 percent, to 9-13/32, with nearly 121 million shares changing hands, making the Internet infrastructure company the most actively traded stock on the Nasdaq market and the seventh-largest single-day volume for a stock in Nasdaq history.
The GTE subsidiary raised $1.9 billion late Tuesday, pricing 173.9 million shares at $11 each. That was below its expected range of $12-to-$14, through underwriters led by Morgan Stanley Dean Witter.
Burlington, Mass.-based Genuity's performance follows one of the strongest days for the IPO market. On Tuesday, three deals produced strong debuts, with chip maker Marvell Technology Group Inc. (MRVL: Research, Estimates) climbing 278 percent.
Genuity Inc. (GENU: Research, Estimates) is an Internet backbone provider offering Internet access, Web hosting and other e-commerce services to enterprise and service providers.
The 30-year-old company has a long history on the Web. In 1969, Genuity's predecessor, BBN Corp., designed and developed the ARPAnet that is recognized as the basis for the current Internet. Genuity also claims to have developed the first e-mail message and pioneered the use of the @ symbol as a standard for electronic mail.
Irv DeGraw, research director at WorldFinanceNet.com, credited the issue's large share size as well as Genuity's weak financial performance for causing the dismal performance.
"The problem is that Genuity is big, substantial and good at what it does, but they have negative gross margins," he said. "Losses are off 12 percent in the most recent quarter and their gross margins are consistently negative. If they're so good, how come they are so bad in terms of cash?"
DeGraw had expected the deal to produce a small pop. The real key, he said, is whether Genuity will be able to compete once it no longer is protected by parent GTE Corp.
"UUNET is their biggest competitor and we know what UUNET can do," DeGraw said. "Genuity has a nice heritage, but what have they done lately? They're riding on their heritage."
The Verizon connection
GTE Corp. (GTE: Research, Estimates) is merging with Bell Atlantic Corp. (BEL: Research, Estimates) and will operate under the name Verizon Communications. As part of the $64.7 billion merger, GTE will retain a 10-percent stake in Genuity that it will roll into Verizon, analysts said.
Genuity plans to use proceeds for capital expenditures, including expanding its fiber network, and general corporate purposes.
"Genuity is a big white elephant with enormous yearly losses," said Francis Gaskins, president of GaskinsCo.com.
For the three months ended March 31, Genuity reported a net loss of $209.9 million on revenue of $247.9 million, compared with a net loss of $138.6 million on revenue of $157.3 million a year earlier.
America Online accounted for 52 percent of Genuity's revenue in 1999 and 46 percent for the first quarter of 2000. In December 1999, Genuity extended its relationship with AOL until 2006, whereby it will provide dial-up as well as broadband backbone Internet services. Genuity also will operate the existing dial-up network for AOL Japan Inc.
Genuity's other customers include heavyweights such as Compaq, Microsoft Corp., Sun Microsystems, CNN, Yahoo!, Computer Sciences Corp., and Sapient.
Genuity faces increased competition in the Internet infrastructure sector, especially from companies such as the UUNET Technologies subsidiary of WorldCom, AT&T, Cable & Wireless and Sprint.
In trading Wednesday, Bell Atlantic fell 1-1/16 to 52-9/16, while GTE dipped 1-7/16 to 63-7/8.
Doing the price range shuffle
Investment banks tried to get a handle on the market tone in a week that has already seen a huge debut and a large deal fall flat, with three companies boosting their price range and another cutting back.
Storage Networks displayed great confident, raising its price range to $23-to-$25 from $17-to-$19. The data storage company now plans to raise about $216 million by pricing 9 million shares.
The company provides network data storage with Web hosted data storage, both important areas as the need for great storage capacity increases. Led by Goldman Sachs, the company will trade on the Nasdaq as "STOR." It is expected to price on Thursday.
Chinese Web portal Sohu.com also upped its range, from $13-to-$16 to $16-to-$19. The company postponed its IPO in May because of market troubles and Chinese regulatory difficulties.
Sohu.com, trading as "SOHU," should now raise $80.5 million with 4.6 million shares priced. Credit Suisse First Boston is leading the deal, but have yet to determine a pricing date.
The activity was not confined to the tech sector as electrical company CapStone Turbine Corp. made an unexpected move. CapStone had already decreased it price range and boosted the number of shares, looking to raise about $99 million.
On Wednesday the company pumped up its range by $4, to between $14 and $16, which would see CapStone raise about $136 million. Another Goldman Sachs deal, CapStone will trade on the Nasdaq as "CPST." 
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