Outlook: Computer stocks

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The Independent Online
THERE'S ONE sector where even small companies are the investor's favourite. Executives only have to mention the words information technology and investors start drooling. Not surprisingly, they are cashing in. At least three IT firms - Synstar, Axon and Morse - are at various stages of raising funds. More may follow before the end of the year.

These three companies are all in very different areas of the market, with varying growth rates and prospects. What they all have in common, however, is that they will be capitalised at pounds 300m or less - the small- cap bracket that fund managers have tended to ostracise.

Some firms have good reasons for going public. In a fast-growing industry, they need extra capital to expand and can also use their stock as a currency for acquisitions. A stock market listing also allows companies to offer share options as a way of hanging on to their staff.

Nevertheless, the latest batch may have other motives. Enthusiasm about growing demand for computer services has driven valuations to extreme levels. In some cases this is justified - particularly those with exposure to mobile telephony or electronic commerce. However, others will have a harder time living up to expectations as the IT market slows towards the end of the year.

So the enthusiasm for IT flotations may soon wane. Yesterday's embarrassing debut from Synstar - when the shares dropped 7p below their 165p issue price on the first day's trading - will not have helped. The float appears to be a clear case of CVC, the venture capital group, capitalising on sky-high valuations to make a quick turn on an investment it made only 18 months ago.

With the current batch of IT new issues, it may be that investors are able to pick up the shares at a cheaper price once they have been on the market for a few months.