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Dot-coms to test IPO market

If Google goes public, analysts say floodgates could open once again


By Jennifer Davies
STAFF WRITER

September 28, 2003



Dot-coms are going public again.

No, that's not an April Fools' Day joke.

Internet companies really are looking to conduct initial public offerings and raise millions of dollars from investors.

While it is just a smattering of dot-coms that have filed for IPOs, the market has thawed to the point where the much-maligned Internet companies can talk about the idea without it seeming like a punch line.

"There is a new wave of dot-coms," said Jeffrey R. Hirschkorn, senior analyst at the IPO Monitor, a national newsletter tracking the IPO market. "These are companies that can make money."

Just last week, Red Envelope, a specialty online retailer, went public, raising some $75 million. While Red Envelope's stock failed to skyrocket like the Internet IPOs of a few years ago, the shares, which went out at $14, hovered in that range in its first week of trading.

And there are other companies waiting in the wings. Orbitz, the travel site, recently filed for an IPO, as did San Diego company Provide Commerce, formerly known as Proflowers.com, an online flower delivery business.

Provide Commerce filed last week, hoping to raise $75 million to expand its business into other areas. Provide Commerce plans to launch two businesses that rely on the timely delivery of perishable items. The company's Uptown Prime will offer premium meats and compete against such companies as Omaha Steaks, and its Cherry Moon Farms brand will offer fresh fruits and compete against such companies as Harry and David.

Chris Woolley, managing director of Comerica Bank's technology and life sciences business, said the return of the Internet IPO is not so surprising.

"The public market for all types of companies but particularly for Internet and high-tech companies have been closed for years, so there is this whole backlog of quality companies waiting for the chance to do an IPO," he said.

Scott Kessler, an Internet and software analyst for Standard & Poor's, who recently wrote a report on the Internet's rebound, agreed that the dot-com bust is now helping the companies that remained in business.

"The Internet sector shakeout of the past several years has left surviving dot-coms with less competition and greater pricing power," Kessler said.

The performance of established Internet companies and their increasing stock price has also helped boost the industry's overall image, Hirschkorn said.

Yahoo!, one of the pioneers of the Internet, has seen its share price jump in the last year from less than $9 to about $35. Amazon.com, the well-known online bookseller, has also seen its share price perform well, with its stock rising from $15 last fall to close last week above $48.

"That is very key because people look at them as a barometer," Hirschkorn said.

But the real sign that the dot-com comeback is official will be when mammoth but private Internet companies, such as Google, decide to access the public markets. The wildly successful search engine company, which many estimate has annual revenue of nearly $1 billion, has denied any interest in going public. That hasn't stopped analysts from speculating about the possibility, predicting Google will conduct an IPO in the early part of 2004.

"Google is really the next big thing," Hirschkorn said.

Woolley agreed that an IPO by Google could really open the floodgates for other Internet and high-tech companies.

The potential danger of that success is that it could breed copycat companies of lesser quality. If the IPO market is once again awash in iffy dot-coms that don't have strong profits and an equally strong and sustainable business model, it could stop the fledgling signs of recovery.

"The risk is going to be all the me-too guys that come along," said Woolley.

The key to a sustained recovery of the Internet IPO market will have a lot to do with the stocks' performances over time.

"If some of these are unsuccessful in the after-market when they go out at $10 and then drop to $8 to $6 to $4 to $2, that would have a real damper," Woolley said. "If there are good performances, that go out at $10 and then goes up to $12, $14 in a matter of weeks or months, there are companies that are going to dip their toes in the water."

Red Envelope's flat performance makes it unclear how receptive investors will be to Internet companies. While Hirschkorn said its stable performance is a strong sign, other analysts raised concerns about the company because it has not yet made money. For the fiscal quarter ended June 30, Red Envelope reported a loss of $1.2 million on revenue of $17.7 million. For the same quarter last year, the company had losses of $2.3 million on revenue of $15.3 million.

Red Envelope is hardly the only money-losing dot-com looking to raise money through the public markets. Orbitz, the Internet travel site founded by five of the major airlines, has yet to turn a profit but is looking to raise $125 million from a public offering. In its IPO filing, the company said it had revenue of $175.5 million in 2002, with a net loss to $17.9 million, an improvement over the previous year when it had revenue of $43.4 million and a net loss of $103.2 million.

That kind of financial performance may dissuade average investors from taking another chance on a dot-com.

"The history is what it is. There is a bad taste left in a lot of investors' mouths," Woolley said. "It's really more about getting the professional investors who are a little less tied up in the 'Gosh, I was burned once. I'm never going to try that again.' "

http://www.signonsandiego.com/news/uniontrib/sun/business/news_1b28ipo.html