Internet IPOs Debut in Record Numbers in First Half of 1999

Internet IPOs Debut in Record Numbers in First Half of 1999

Publications

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)

January

4

289.7

February

10

614.5

March

12

1,164.2

April

19

1,385.2

May

30

2,953.0

June

39

3,340.2

Total

114

9,746.7

Anything Goes?

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
Price ($)

%Change

Healtheon

2/10/99

8.00

77.00

863%

priceline.com

3/29/99

16.00

115.56

622%

VerticalNet

2/10/99

16.00

105.00

556%

Redback Networks

5/17/99

23.00

125.56

446%

Covad Communications Group, Inc.

1/21/99

12.00 1

53.31

344%

Juniper Networks

6/24/99

34.00

149.00

338%

StarMedia

5/25/99

15.00

64.13

328%

Ariba

6/22/99

23.00

97.25

323%

F5 Networks

6/3/99

10.00

41.00

310%

Bottomline

2/12/99

13.00

53.00

308%

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
Price ($)

%Change

Topjobs.com

4/27/99

12.00

5.56

-54%

COMPS.COM

5/5/99

15.00

7.38

-51%

Intelligent Life

5/13/99

13.00

6.56

-50%

Fashionmall.com

5/21/99

13.00

7.19

-45%

NetObjects

5/7/99

12.00

8.06

-33%

TownPagesNet.com

4/30/99

10.00

7.00

-30%

GenesisIntermedia.com

6/14/99

8.50

6.13

-28%

BiznessOnline.com

5/12/99

10.00

7.31

-27%

Alloy Online

5/14/99

15.00

11.44

-24%

Flycast

5/4/99

25.00

19.13

-24%

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.

Leading Underwriters

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%

Outlook

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.

David A. Westenberg
Senior Partner

[email protected]

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.

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