We're safe from IPO fever, for now

Memories: The good ones are of fortunes made. The bad ones are of fortunes lost.

Dollars & Sense

October 28, 2001|By Bill Atkinson | Bill Atkinson,SUN STAFF

No long ago, investors salivated at the chance to buy initial public offerings - shares in companies going public - especially if they had dot-com tagged onto the end of their name. They raced to open accounts at brokerage houses and at online trading firms that were eager to help them try to win a big payday.

"There was so much money floating around," said Mitchell Peremel, vice president of Peremel & Co., a Baltimore discount brokerage. "Suddenly, there was a casino atmosphere. Now, everybody is down and out."

Investors who were caught up in the IPO fury learned a painful lesson when these stocks collapsed: Don't gamble with money you can't afford to lose. Hilary G. Platt, president of Perpetual Wealth Inc., a Glyndon-based financial adviser, said investing in IPOs should be undertaken only with "money that you can afford to put completely at risk."

The market for initial public offerings has cooled since 1999 and early 2000. Only 63 companies had gone public as of Oct. 15, raising $27.7 billion, according to investment research firm Dealogic. Last year, 397 companies went public, raising $71.9 billion. The year before, 512 companies went public, and they raised $70.8 billion.

"Is there a market today? Sure, we are seeing one IPO getting done a week," said Douglas J. Baird, head of U.S. Equity Capital Markets at Deutsche Banc Alex. Brown in Baltimore. "We are now crawling out of a period when people did not want to buy IPOs of any kind at any price. It is like springtime here, you are starting to see some buds on the trees."

Instead of wildly pumping money into risky Internet companies with no track record, little revenue and a negative bottom line, investors are looking for more solid companies, experts said.

"People certainly have higher standards for what they are looking for than they did 17 months ago," said Daniel T. McHugh, president of Lombard Securities Inc., a Baltimore-based independent broker dealer.

Companies that have gone public this year include Kraft Foods Inc., Philip Morris Cos.' big food unit; KPMG Consulting Inc.; and Accenture, a consulting company formerly known as Andersen Consulting. Prudential Financial Inc. plans to tap the IPO market later this year to raise $3.9 billion.

They are in sharp contrast to the scores of dot-coms and technology businesses that inhaled billions from investors from 1999 to March 2000. Investors were swept into the IPO frenzy as stock prices zoomed and every new issue seemed to result in a huge payoff.

Shares of VA Linux Systems Inc. soared nearly 700 percent the first day they traded; Foundry Networks Inc.'s shares vaulted 525 percent; Priceline.com's jumped 331 percent; eToys Inc.'s rose 291 percent; and Red Hat Inc.'s closed up 271 percent.

eToys has since gone out of business, and the others now trade at a fraction of their highs.

"There were people saying, `Yeah, Fannie Mae, this is an old man's stock, I want to buy XYZ Internet stock,'" Peremel said. "The theme was, `It is moving, it is moving, it is moving. I have got to get in.'"

But the Nasdaq peaked March 10, 2000, and the market began to unravel. Stock prices in many of the newly financed companies burst; businesses failed; and the roaring IPO market fizzled.

"That ended it," McHugh said. "Certainly, now there are a lot of people crying the blues because they wanted [IPOs] and got them."

Experts are optimistic that the IPO market will rebound. But for that to happen, corporate profits must improve and the stock market has to rise.

"The future of the IPO market is inextricably linked to a healthy stock market," Baird said. "People ... making money day in and day out ... that is the first thing you need to see to begin forecasting a robust IPO market."

Baird said the window for IPOs is opening.

"Deals are getting done for the first time in a long time," he said.

But when the window opens wider, will investors pile through as they did in 1999 and 2000? Peremel doesn't think so. He believes that lessons have been learned, if painfully.

"You live and learn," he said.

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