IPO market remains in rude health despite hi-tech wobble

Last week's correction has not eroded demand for New Economy floats
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The Independent Online

The stock market's gyrations may have caused a host of high-profile flotations to be postponed, but investors' continuing love affair with the New Economy means the new issues market - for quality companies - is here to stay.

The stock market's gyrations may have caused a host of high-profile flotations to be postponed, but investors' continuing love affair with the New Economy means the new issues market - for quality companies - is here to stay.

The death of the IPO market looked possible this week after Yes Television, the video-on-demand provider, pulled its float on Monday following Wall Street's falls on Friday. In the US, AltaVista, the internet search engine, also postponed at the last minute.

Still, there are so many fledgling enterprises seeking to go public that there also were plenty of announcements of future flotations this week. To equity strategists, this comes as no surprise. They say the New Economy remains the only game in town. All that has changed is that investors are becoming far more selective about which new issues represent the best way in to the New Economy.

"The broad shift from producing goods to producing knowledge and technology is still the underlying trend, so there's a demand for capital from businesses in those areas - and a demand from investors to participate," says Mike Young, equity strategist at Goldman Sachs. "It won't take as long as the shift from the agricultural to the industrial economy, but the idea it's all going to end in a decade is ridiculous."

However, investors are no longer willing to throw money at new technology issues indiscriminately, for several reasons. The prospect of rising interest rates and bond yields around the world has created an anxious climate in equity markets, leaving plenty of bargains around, in particular in Old Economy sectors like food production and engineering. Venture capitalists and directors are soon to be released from lock-in periods and are likely to release more shares into the market, depressing share prices. Above all, technology stocks have lost their scarcity value. Bill O'Neill, equity strategist at HSBC, says: "The New Economy is still the only game in town, but not on any terms. Investors will demand that companies have an earnings history and products which cannot be easily copied."

Andrew Learoyd, a managing director in capital markets at Goldman Sachs, says there is now a greater supply of technology investments than there was when Freeserve, London's first big internet float, came to the market last July. "Since last year the European IPO market has been propelled by scarcity of supply. Investors were desperate to be in the New Economy, but were relatively indiscriminate about what they were buying and what value they were prepared to pay. As a result, we have seen the build-up of an enormous pipeline of flotations for very young companies of very varying quality looking to exploit the demand/supply imbalance."

Goldman expects that at least three quarters of IPOs in the coming months to be related to the New Economy. However, Mr Learoyd expects the market to become increasingly selective, with investors looking for clear winners. Valuations could be reined back, not least because New Economy stocks in Europe have been trading on a 50 to 100 per cent premium to their US peers, he says.

Against this backdrop, investment banks are likely to delay some floats to allow companies to build up a few extra quarters of earnings. "Pure" dot.com companies, in particular those looking to raise money to establish business-to-consumer (B2C) websites will find few fans in the big banks.

There is, however, hope for the more speculative internet ventures in the private equity markets. The public market's formerly broad-brush approach towards investing in start-ups mirrored the usual approach of the private equity market, Mr Learoyd says. The private equity market, with funds to invest, will find it a welcome relief that the public market is being more demanding in terms of track record and credibility.

Andrew Carruthers, chief operating officer at NewMediaSpark, an internet incubator that takes stakes in start-ups, says: "Brokers have been bringing very risky things to the market early to meet demand, although we have still found it possible to get into companies early on. From here, our approach will still be to look at the fundamentals. The door is not closed to B2C."

Yesterday brought further flotation announcements from hopeful companies. Thomson Intermedia, which monitors website advertising, is looking for a £30m float to raise £8m. It was founded by husband and wife entrepreneurs Stephen and Sarah Thomson with £30,000 just three years ago. Internet Business Group, a website design company, said it would list on Aim in early May following a successful placing which raised £5m. Maziar Darvish, IBG's founder, said: "We're very happy to have completed the placing. We appear to have good institutional support and look forward to impact day. I don't think that any of our investors are in for the short term."