The first half of 1999 was a glorious time to be an Internet company going public. Strong investor demand, coupled with a flood of willing companies, led to a record 114 IPOs by Internet-related companies (dubbed " i POs"), raising $9.75 billion. This compares to 21 i POs in the first half of 1998 raising $951.1 million and 42 i POs with proceeds of $1.96 billion in all of 1998. In the six months ended June 30, 1999, i POs accounted for roughly half of all U.S. initial public offerings.
A Quickening Pace
The parade began slowly, with only four i POs in January, as the market continued to recover from its fall 1998 swoon. The pace and proceeds of i POs increased as the year progressed:
|Month||Number of i POs||Proceeds (millions)|
At times, the demand for i POs seemed insatiable, and Internet companies of nearly every stripe and pedigree launched public offerings. Included were long-established household names such as Prodigy, DLJ (DLJdirect) and Barnes & Noble (barnesandnoble.com), as well as newly-minted Internet companies such as priceline.com and drkoop.com.
Little revenue? Big losses? Neither seemed to matter early in the year, as the new metrics for i POs confounded traditional observers schooled in P/E ratios. Concepts like "early mover," "first in space" and "growth prospects" drove valuations to unprecedented heights.
But as the volume of i POs picked up and large-cap Internet companies saw their market prices tumble from all-time highs, the first day prices of i POs were no longer guaranteed to soar from their openings. On May 5, 1999, COMPS.COM was the first "broken" i PO of the year as its first day price closed below its offering price. By the end of the half-year, Internet companies with solid credentials were still finding receptive audiences, but marginal candidates were withdrawing or trading down after their i POs.
Winners and Losers
There were some spectacular opening days for i POs in the first half of 1999, led by MarketWatch.com (474% increase on first trading day), priceline.com (331%), Healtheon (292%), Ariba (291%) and eToys (283%). Of the 114 i POs, 15 more than tripled on their opening days and 40 more than doubled. The average first day gain was 154% for i POs in the first quarter and 73% for i POs in the second quarter.
On a more sustained basis, at least as measured in Web time, the biggest winners were:
|Company||i PO Date||i PO Price ($)||6/30/99 |
|Covad Communications Group, Inc.||1/21/99|
1 adjusted for 3:2 split on May 19
As investors became more selective and the volume of i POs soared in the second quarter, some i POs stumbled. The worst performing i POs in the first half of 1999, all of which debuted in the second quarter, were:
|Company||i PO Date||i PO Price ($)||6/30/99 |
Overall, there were more winners than losers, with 73% of the first-half i POs closing on June 30, 1999 at a higher price than their i PO prices, 26% closing lower and one unchanged. The average first-half i PO closed on June 30, 1999 at double its offering price.
Once again, first quarter i POs outperformed second quarter i POs. The average first quarter i PO closed 193% above its offering price on June 30, 1999, but the average second quarter i PO closed "only" 72% above its offering price on June 30, 1999.
East Coast Edges West Coast
New York spawned three of the five largest i POs of the first half of 1999, TD Waterhouse Securities ($1.01 billion), barnesandnoble.com ($450 million) and dljDirect ($320 million), but California led the pack with 40 i POs. Following California were New York (22), Massachusetts (8), Texas (6), Connecticut (5) and Virginia (5). Overall, of the 114 i POs in the first half of 1999, 56 were by Internet companies based in the Eastern U.S. (east of the Mississippi River) raising $5.46 billion, 54 were based in the Western U.S. raising $4.11 billion and four were based in foreign countries raising $179 million.
In the first six months of 1999, the underwriters lead-managing the most i POs were:
|Lead Underwriter||Number of i POs|
|Banc Boston Robertson Stephens||15|
|Goldman, Sachs & Co.||14|
|Credit Suisse First Boston||11|
|Morgan Stanley Dean Witter||10|
|Bear, Stearns & Co. Inc.||9|
|BT Alex Brown||8|
Top Law Firms
The law firms participating (as counsel to the issuer or underwriters) in the most Eastern U.S. i POs in the first half of the year were:
|Law Firm||Total i POs||Percentage of Total|
|Hale and Dorr||12||21.4%|
|Brobeck, Phleger & Harrison||9||16.1%|
|Cravath, Swaine & Moore||8||14.3%|
|Testa, Hurewitz & Thibeault||5||8.9%|
|Davis, Polk & Wardwell||4||7.1%|
|Skadden, Arps, Slate, Meagher & Flom||4||7.1%|
Investors enthusiastically embraced Internet-company i POs in the first half of 1999. Much of this reflected the merits of particular companies, but supply and demand for Internet stocks also played a role. As the volume of i POs increased in the second quarter, aftermarket performance suggested that investors were exercising greater selectivity among Internet companies. At June 30, there were more than 150 i POs in the pipeline, and the total dollar volume of pending i POs exceeded the total dollar volume of all i POs completed in the first half of the year. Although the sheer volume of recent and pending i POs inevitably affects demand, strong economic conditions, coupled with the inexorable shift to a Web-based economy, should continue to foster i POs for the balance of 1999.
Note on Data: All data in this review was compiled by Hale and Dorr LLP. Offering proceeds exclude proceeds from exercise of underwriters' over-allotment options, if applicable. The data came from a number of sources, including IPO Central, IPO Data Systems, SEC filings, Thomson Financial Securities Data and the Washington Service Bureau.