At the end of last year, it looked as if the market for initial public offerings (IPOs) of Internet companies had died under the weight of supply and concerns about the broader market place. In the past few months it has exploded again, and the flow of new IPOs in the coming weeks looks almost unstoppable, raising questions about whether history will repeat itself.
The IPO market as a whole had a hair-curling ride last year, culminating with Stephen Paternot and Todd Krizelman making Wall Street history when their Internet company, theglobe.com, surged to a record premium on the first day's trading. The huge volume of public offerings in the first half of the year then dried up as oversupply, turmoil in the broader market and poor performance in the after-market hit demand. In the first quarter of 1998 there were 65 deals raising $5.5bn (pounds 3.3bn) in equity, according to Renaissance Capital's IPO Intelligence Online, rising to 104 deals and $15bn in the second quarter. The third and fourth quarters combined saw only 78 deals, raising $24bn.
But the IPO market has taken off again this year, with dozens of deals hitting the market. Most - and certainly the most lucrative for the investors - are Internet-related. In February 1998 there were 46 IPOs of which two were Internet-based, according to IPO Reporter newsletter. In February 1999, there were 36, of which 10 were Internet-related, and by the end of February, 28 new Internet companies had filed notice of plans for offerings.
The stock which ended the IPO doldrums was eBay, the online auctioneer, which is one of the few Internet companies to actually make a profit. Its target price last September was $18 a share and it ended the first day at $47; by December 31 it stood at $241.25, up 1,240 per cent.
The Internet frenzy is being fed by venture capital firms, which poured a record $12bn into new companies last year, according to Ventureone, a San Francisco research firm. Although the number of deals plunged as the market collapsed at the end of the year, Internet startups accounted for about a third of venture-capital backed IPOs, compared to 12 per cent the year before. In the third quarter of last year, mergers and acquisitions heavily outpaced IPOs, as larger technology companies bought out Internet startups, but now the direction of movement is back towards public offerings. The results - for investors, venture capitalists and the companies concerned - are too attractive to miss.
These deals have shown some extraordinary performers, such as iVillage, a women's network. The company doubled the expected starting price range before it launched, and even then the stock ended its first day up more than 230 per cent. It sold a 16 per cent stake to raise $87.6m.
MiningCo.com, an Internet search service, earlier this month raised its expected share price from $12-$14 to $23-$25, an indication of the scale of the demand. It priced at $25 last week, and started trading at $55.
Most Internet stocks have debuted up more than 100 per cent on their first day, and the trend is for the price range to be doubled before launch. Priceline.com, which sells financial and travel services, became the latest on Friday last week, raising its price range to between $12 and $14 from $7 and $9.
There have been plenty of stocks in there for eager investors: Cheap Tickets, a Hawaii-based airline ticket re-seller, MarketWatch.com, a financial information site, and many others. Those expected to make their appearance in coming weeks include some established companies floating off the Internet- related arms of their business, attracted by the growing frenzy. Barnes and Noble, the large US bookseller, and Bertelsman, the German media company, are to offer shares in their online joint venture, Barnesandnoble.com, and Donaldson Lufkin & Jenrette Securities is floating part of its DLJdirect online trading service. One of the latest to file is topjobs.net plc, a British-based recruitment advertising company.
The apparent attractions of these stocks for individual investors have helped keep interest at fever pitch, especially amongst the day traders who devote their lives to the market. The dozen or so Internet offerings that have already priced this year have risen an average of 200 per cent from their offering prices. But it is worth pointing out that there are plenty of risks as well. Few individual investors were in for the kill on the first day. Investors who bought in the retail market at the starting price would have lost money on IPOs taken as a whole last year. Most of the gains - and most of the demand now - comes from the large institutional investors.
The IPO market is almost completely absorbed with Internet stocks at the moment, raising some questions about the market's broader strength. Other IPOs like the management recruitment firm Korn/Ferry, or the fruit company Del Monte, have performed much less impressively. Eleven deals are set to come to market this week; but five are held over from last week. Pepsico's Pepsi Bottling Group is among them, and it is planning to raise around $2.5bn. It is emblematic of the market's problems that it may go with less than a bang. Of seven IPOs last week, five - all Internet- related - soared; the other two (Ducati Motor Holdings and Delta Galil Industries) hit trouble.
The attractions are clear, when the deal works. The venture capitalists get a huge return on their investment; the institutions which buy the stocks make a fast killing, and the individual investors who take on the stocks have a reasonable expectation of stunning gains. When Broadcast.com goes up 250 per cent in its first day, everybody is happy; but not every stock follows that pattern. The boom may be losing momentum: even though the figures for last week's launches look spectacular, they are down from average gains of more than 200 per cent earlier in the year.
Hanging over the market is the question of last year's collapse. That was in part the result of heavy oversupply, coming at a time when demand was sloping off and concern was rising about the rest of the world. Non- Internet IPOs are already having to postpone deals. But there are more than enough Internet deals in the pipeline this year to make for a busy calendar: the question is whether there is the momentum there to support them.