December 18, 2003 6:50 AM PST

Tech IPOs picking up steam

This week's initial public offering from travel site Orbitz proved to be something less than out of this world, but other tech IPOs have been blasting off in 2003.

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What's new:
Though this week's initial public offering from travel site Orbitz proved to be something less than out of this world, other tech IPOs have been blasting off in 2003.

Bottom line:
The increased momentum doesn't necessarily herald a return to the heady days of the dot-com boom, but it bodes well for companies like Google and Salesforce.com, both of which are expected to go public next year.

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With the year nearly over, shares in companies that launched IPOs in 2003 are up an average of 28 percent from their initial price, according to research firm Thomson Financial. And some stocks are greatly exceeding that. Shares in iPayment, a credit card processing specialist, are up 85 percent since the company's IPO in mid-May, while Digital Theater Systems stock is up 50 percent since the firm's July IPO.

"Things are improving with tech deals," said Richard Peterson, chief market strategist for Thomson. "I think next year we'll see even further gains. The pipeline for deals has also been building since September."

The increasing momentum is good news for companies like Google and Salesforce.com, both of which are expected to go public in 2004. (Neither company would comment on its IPO prospects for this story, but Salesforce on Thursday filed initial paperwork for an IPO with the Securities and Exchange Commission.)

Twenty-two tech IPOs have hit the market during 2003, according to Thomson Financial. Of that group, 12 were priced above their initial pricing range when they actually began selling.

"More than half of the year's IPOs have come to market at the high end of their original filing range," Peterson said. But as the Orbitz situation makes clear, there are exceptions. Petersen added that "more than one-third are now trading under their offer price."

The "have, have-not" situation stems from several things: market conditions when the stocks debut, the financial condition of the companies, their particular market, and the degree to which investment bankers push the IPO price toward the maximum level institutional investors are willing to pay--leaving little upside for other investors once the stock starts trading, said David Menlow, president of IPO Financial Network.

Orbitz, for example, was priced above its initial range but ended its first trading day below its IPO price of $26 a share. Still, it went out at $2 above the high end of its original pricing range. But just the week before, Ctrip.com International, another online travel service, posted an 88.6 percent jump after setting its IPO price $2 above its initial range.

Orbitz faces such challenges as an anticipated decline in the fees airlines pay the company, with such transaction revenue expected to drop by nearly 25 percent in three years. Also, the markets were not faring as well when Orbitz went public. Investment bankers, too, may have pushed the company's IPO price to the limit investors were willing to pay, hurting the potential for the stock to rise once it started to trade in the open market, IPO analysts said.

"I think the bankers tooted their own horn. They like to say they priced a deal x above its pricing range," Menlow said.

Steady companies
All but three of the tech IPOs in 2003 occurred in the second half of the year, according to Thomson Financial, and the firms involved in the latest round of IPOs all seem to conform to a similar profile. Typically, they've been around for a number of years, mine a niche area in some proven market, and have established, or are close to establishing, profitability by the first day of trading. Also, a number of the companies raised their IPO price above their initial range, yet still enjoyed a hearty pop when trading began.

IPO chart "There is a sense that the deals being done are better than what we've seen in years," said Menlow. "The financial profiles of these companies are wonderful, and there is a wider range of sectors. Investors aren't jumping into a company just because it's in a hot sector."

Tessera, for instance, launched its IPO last month. The designer of semiconductor packages set its IPO price at $13 a share, a couple points above its initial range of $9 to $11. On the first day of trading, the stock closed up 42.3 percent and now trades around $17 a share.

Tessera, like most of the other recent tech issues, has been operating for a number of years and is in the black. The company was founded in 1990 and has been profitable since 2001, after a multimillion-dollar legal settlement with Texas Instruments and Sharp. Its customers include Intel (which licenses Tessera's technology for multiple chip packages) and Toshiba.

FormFactor, which makes semiconductor testing equipment, fits a similar profile. Founded in 1993, the company has garnered $66 million in revenue and $4.5 million in net income for the first nine months of the year.

Right before going public June 12, FormFactor set its IPO at $14 a share--up from its initial range of $9 to $11. On the first day of trading, shares rose to $21 before settling down to $18 by close of day, according to IPO Home. The stock currently trades in the $17 to $18 range.

Credit card processing specialist iPayment, meanwhile, has seen its stock rise from an opening price of $16 in May to between $29 and $30 today. In the third quarter, the company saw revenue rise to $59.8 million , a 105 percent jump from $29.2 million in the same quarter the year before. Net income came to $5.1 million.

"The typical first-day gain for tech stocks is 23 percent," Peterson said. By contrast, Ctrip.com posted the greatest first-day gain of the year. The company set its IPO price at $18 a share, two points above its initial filing range of $14 to $16 a share. But the stock still soared a whopping 88.6 percent on its first trading day last week.

Synnex, an information technology distributor founded in 1980, went out at $14.50 last month and has largely stayed there.

Meanwhile, other companies have been gobbled up in nine acquisitions. On Monday, storage giant EMC bought VMware, which specializes in software for provisioning servers in a database, for $635 million, while Check Point Technologies bought Zone Labs for $205 million.

But not all buyouts are leading to huge deals. Sixty-three semiconductor companies were bought between January and November, inclusive, noted Ken Lawler, general partner at Battery Ventures. Although the average price of these deals was $40 million, three quarters of the deals did not come with announced buying prices. That means most of these companies probably sold for between $5 million and $10 million, he said.

Other companies gearing up for IPOs include Wi-Fi specialist Atheros and Motive, which sells software that lets users troubleshoot their own computers and electronic devices. Dell, Hewlett-Packard and others are Motive customers. The company was founded in 1997.

Despite the recent momentum of tech IPOs, analysts note it remains a far cry from the go-go days of 2000.

"We're seeing a positive return to IPOs," said Menlow, "but there's nothing indicative of a runaway market."

 

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