By Kevin Maney and Matt Krantz
USA Today
December 4, 2003
Michael Chasen, CEO of education technology company Blackboard, has received calls from more than a dozen investment bankers who say the market for tech IPOs is back.
For three years, initial public offerings of stock have been all but dead. Now, the market is reopening with a cautious few. Behind the scenes, investment bankers, venture capitalists and CEOs are revving the machinery that will likely produce more in 2004. Blackboard, which has 500 employees and expects $90 million in revenue this year, may be among them.
Momentum for tech IPOs seems to be building. Fifteen began trading in November, the busiest month in two years, says IPO tracker Renaissance Capital. If all goes as planned, December will be the busiest month for IPOs since the bull market’s dying days. Speculation is high that search-engine star Google might do a huge IPO next year, and most tech IPOs of late have exceeded investors’ rock-bottom expectations.
An IPO rebirth would be good news for the economy. Tech IPOs are famous for providing windfalls for the lucky few who buy the stocks at the offering price, but they do more: IPOs are a source of money for young companies that want to grow and create jobs. Those companies buy computers, software and other technology. IPOs can be the beginning of a virtuous economic cycle.
But don’t look for anything like the IPO craze of the late 1990s. Everyone’s learned their lesson — or so they say. Tech IPO candidates need more than a big idea. Investors are demanding Old Economy profit and growth. That means delayed IPOs for some start-ups, maybe none for marginal players.
“Investors are still really burned,” says Linda Killian, portfolio manager at Renaissance Capital. “The underwriters are going to be a lot more careful about what they put forth.”
One example of the new breed of IPO is Orbitz, the popular travel site founded in 2000 by five major airlines. It had revenue of $172 million the first nine months of 2003 and lost $2 million — an improvement from losing $19 million in 2002. An Orbitz IPO is expected to raise $300 million.
But nothing might wake up the market like a Google IPO. “Google is certainly shaping up to be a landmark public capital market event,” says David Sikora, CEO of Pervasive Software, a public company.
Google has not said it is pursuing an IPO. The buzz comes from news reports about Google executives meeting investment bankers. Excitement is building in Silicon Valley, which would see an explosive Google IPO as a sign that the party is back on. Venture capitalists, stuck for three years with no way to cash out of companies in which they invested, are calling their companies’ CEOs to persuade them to go public.
That’s been the experience of Justin Kitch, CEO of Web-site-hosting company Homestead. He’s concerned about a renewed glint of the greed of the Internet bubble days. “The craziness is coming back,” Kitch says. “I’m afraid it’s going to happen again.”
Weaker players weeded out
In an odd way, the tech IPO bust could fuel a tech IPO rebound.
In good years for Wall Street, about 400 companies go public. In the first six months of 2003, there were six. Tech IPOs in particular became radioactive the past three years. No investment bank would touch them. As a way to raise capital, tech companies had to forget about the public markets.
But that had a positive effect for well-funded tech firms. A hot IPO market pressures a company to go public quickly, which pressures it to get a product or service out the door and quickly build a customer base, even if it means giving away the product or service. IPO mania also means that even weak companies can raise money by going public, so more companies end up fighting it out in every niche, hurting better-run companies.
The frigid IPO environment of the past few years has been very different. Tech companies have remained private. They’ve taken their time perfecting products or services. Stronger companies have seen competitors wither.
“We haven’t had to worry about other overfunded companies in our space,” says Blackboard’s Chasen. “We could buckle down.”
Google (founded in 1998), SalesForce.com (founded in 1999) and VMware (1998) decided to do the same: remain private, build their businesses and go public once the markets turned more receptive. Now, they’re all considered hot IPO candidates. Google has become a dominant force on the Web, processing more than 200 million search requests a day and nabbing the spotlight as the go-to Web site for almost anything.
SalesForce solidified its role as a leader in so-called Web services. It allows corporate sales teams to record and track data on SalesForce’s Web site, for a fee.
VMware dominates in software that “virtualizes” computer servers, allowing them to run several operating systems at once.
All three say they’re profitable. Google’s revenue in 2003 could approach $1 billion, SalesForce’s, about $100 million and VMware’s, about $50 million. Blackboard’s revenue this year will be about $90 million. Such companies are solid enough to convince wary investors it’s safe to try another tech IPO.
“No one in their right mind is willing to speculate on the industry the way they did three years ago,” says Irv DeGraw, professor of finance at Washington College. “We’ll see more tech (IPOs) next year. But they have to be proven business models. This happens all the time. We go through these phases.”
In 2001-2002, the median age of tech IPO companies rose to nine years, showing the caution that infused the IPO market. The median age of tech IPOs was only four years in 1999-2000 — and many were just 18 months old, says Jay Ritter, professor of finance at the University of Florida.
Hot market a breeding ground
No doubt, the IPO rally is still embryonic and fragile. A downturn in the Nasdaq or other events that hurt the economy could persuade tech companies to put off IPOs. Because IPO-ready companies are more solid than they were in the bubble, they have cash to fund growth without going public.
“There are no pressures for us to do a public offering,” says Blackboard’s Chasen. “We don’t need to go public to survive.”
The timing might prove right for Google to light the IPO fuse. Other landmark IPOs that set off a mania for tech IPOs came amid markets that were already hot.
Microsoft (MSFT), for instance, went public March 13, 1986, setting in motion a surge of PC-related IPOs. But the Nasdaq was already roaring, gaining 50% from the beginning of 1986 to the day of Microsoft’s IPO. During 1986, the number of IPOs more than doubled from the previous year.
The same happened when Netscape Communications (Parent: TWX) went public July 8, 1985. The Nasdaq was amid another rally. During the year, investment bankers priced 432 IPOs; in 1986, they’d price 621.
Once again, the Nasdaq is soaring. So far this year, it’s up 47%. If the market continues like that into 2004, Google might become a Netscape-like spark.
Even then, some in Silicon Valley say, the IPO market won’t overheat as it did in the ‘90s.
“Notwithstanding the fervent desires of investment bankers and (venture capitalists), I can’t believe this IPO is going to touch off a new IPO mania,” says Roger McNamee of tech investment firm Silver Lake Partners.
A real mania, the kind that makes investors forget lessons learned in the last one, “won’t happen until we see the commercialization of another general-purpose technology,” says Steve Waite, author of Quantum Investing. Microsoft was part of a new general-purpose technology: the personal computer. Netscape was a landmark of another: the Internet.
The next one? Waite predicts it will be nanotechnology — the science of building products one atom at a time, giving the products new properties. Nanotech, for instance, is behind khaki pants, sold by Eddie Bauer, that look like cotton but repel water like polyester. Wednesday, President Bush signed a bill to invest $3.7 billion for nanotechnology programs in research and development into ways nanotech can detect and treat disease, monitor the environment and produce and store energy.
Waite believes the landmark nanotech IPO will be a company called Nanosys, perhaps in 2004 or 2005. “But nobody can predict that with any accuracy,” he says.
More certain is that tech IPOs will bounce back. “Tech and the IPO market are made for each other,” DeGraw says.
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