Bob Cook, senior editor at Going Public: The IPO Reporter, agrees. "There are so many small deals out there that nobody has time to look at all of them," he says. "Therefore, when they do come out, there's not the interest that there would be otherwise. It's happening already, where companies drop 10% or so because nobody has had time to read their prospectuses."
"Analysts are key to building a market for a stock," Landry adds, "so when you slip off their charts, it's brutal. All you can do is hunker down. Once you get a decent track record, you can try to get people interested again, but it's not easy."
Fortunately, it's not impossible. Quarterdeck Corp., a software company in Marina Del Rey, Calif., is one former orphan that has escaped the NASDAQ catacombs. Public since 1991, Quarterdeck saw its stock reach $26 and then tank in 1992. "Two years ago this company was considered dead," one analyst says. "People thought Microsoft was incorporating the same technology into its software. They wondered, 'Who needs Quarterdeck?"
For more than two years, Quarterdeck stock limped along in the $2 range. It began ticking back up in early 1995, when new CEO Gaston Bastiaens began making acquisitions and broadening the company's line, bringing in a number of products in the white-hot Internet sector. Revenues rose briskly as those deals kicked in, hitting $70 million last year, up from $38 million in 1994, while net income turned positive by $4 million after a $19-million loss a year earlier. As the turnaround gathered momentum and analysts reactivated coverage, investors began to take an interest, and the stock reached $39 last year.
Most orphans aren't as fortunate or as flexible, and entrepreneurs contemplating an IPO during the current frenzy should think twice. "When the market is this receptive, it tempts companies to go public even though they'd be better off waiting," says Jim Scopa, a San FranciscoÑbased managing director for Alex. Brown. "Bad things can happen if they have unexpected setbacks and investors lose interest. Being public is not necessarily nirvana for every company." Bob Keefe, a partner at the Boston office of Coopers & Lybrand, points out that outside forces can wreak havoc as well. "If the economics of this market shift" -- for example, if interest rates change, the money dries up, newly public companies show poor results, or your company's concept falls out of favor -- "the weaker companies will become orphans."
-- J.F. and Jerry Useem
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4. The young entrepreneurial companies will continue to be in the spotlight this year.
Not necessarily. Spin-offs from major corporations are currently the hottest segment of the IPO market. Offerings like the split-up of AT&T and H&R Block's spin-off of CompuServe "are going to take a lot of attention away from the smaller companies that we saw last year," says M. William Benedetto, who heads the investment bank Benedetto, Gartland & Greene in New York City. "People are going to be focused on big companies, big deals. The analyst, for example, who might have had time to study a fast-growing company in the telecommunications business is going to be told by his boss to look at the AT&T spin-off."
But all is not lost for smaller companies. High-tech companies will enjoy another warm reception this year, although IPO analysts say that their altitudinous price run-ups will come back down to earth. As investors become more discerning about Internet stocks, don't expect to see so many triplings and quadruplings right out of the block. A few areas in the Internet sphere are just starting to heat up. Creators of search engines should be hot. Companies that provide secure on-line financial transactions will be in vogue. And waiting in the wings are content providers, such as University Online, that might plunge in if the first wave secures a stable beachhead.
Most analysts, furthermore, agree that a broader variety of companies will go public in 1996 as businesses from less glamorous industries try to capitalize on the technology-led IPO frenzy stirred up last year. Specialty retailers, health-care-management companies, and theme restaurants (headed up by Planet Hollywood) are all in the running to have a banner year. -- J.U.
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5. You need to be profitable to get a high valuation in this market.
That's less true today than ever. The prodigious sums pouring into stock mutual funds -- $129 billion last year -- are fueling a huge demand for and a high valuation of new stock issues, even for companies running in the red. "These high valuations we've been seeing are a function not so much of companies' numbers as of their future projections," says Keefe of Coopers & Lybrand. "People are buying stock based on a company's story or concept rather than its financials."
The most dazzling example of 1995 is Netscape Communications, maker of the Netscape Navigator for the World Wide Web. The California software phenomenon went public last August, with operating losses of $4.6 million in the two quarters before the IPO. But companies of more modest scope are getting attractive valuations in today's market even when they haven't yet turned a dime -- and might not for some time.
In 1993, when Focus Enhancements, of Woburn, Mass., went public, it had been in business just over a year. Founder Thomas Massie was only 31. And the company that year reported losses of $3.8 million on sales of $3 million. But Focus held a few aces. Demand for its graphics software was building. Its board of directors included former top brass at Apple Computer and Atari. And Massie himself had already started and cashed out of another public high-tech company. The offering raised $6 million, giving Focus a market value of $17 million. Aided by that capital infusion, the company turned profitable by $1.2 million last year as sales hit $18 million.
