The IPO Decay Curve
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The surge in Red Hat shows that investors are still interested in IPOs so long as the companies are leaders in hyper-growth industries.
This was the case last week, too, as Internet Capital Group Inc. (ICGE) soared 103%. The company is the leading incubator for the business-to-business (B2B) space. According to Forrester Research, B2B e-commerce is expected to surge from $43 billion in 1998 to $1.3 trillion by 2003.
But if an IPO does not fall within the elite, then things look very bleak indeed. This was the case with HotJobs.com (HOTJ), an online recruiting company, which went public this week. The price range was reduced from 12-14 to 9-11, with the IPO being priced at 8. On its first day of trading, the stock fell to 7-5/8.
Periodically, the IPO market undergoes a cleansing process. Expect this to continue for several months, resulting in many delays and even cancellations. There may also be a jump in mergers and acquisitions activity, as companies seek liquidity.
As the following chart points out, the IPO market has sustained tremendous damage in the past two weeks.
We have seen an interesting pattern which I call the "IPO decay curve." Here's how it works: A hot Internet company hits the public markets, surrounded by lots of media hype. Day traders drive the stock into the stratosphere. Then, the day traders go to the next hot IPO. Consequently, the original IPO begins to fall and fall.
This is what happened with MP3.com (MPPP). Priced at 28, the stock reached 105 and ended its first day of trading at 63.31, giving it a market capitalization of $6.9 billion. In less than a month, the stock is now trading right back at its offering price: $28.
Actually, I confident such patterns will continue; so, dont be surprised if Red Hat falls along the decay curve.
Right now, there are not many B2B companies in the IPO pipeline. But this will change quickly as venture capitalists aggressively prime these companies for the public markets.
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