High Offer Prices Won’t Fly In Low-Altitude Market

The days of the jacked-up offer price for Internet IPOs seem to be over
for now, if recent pricings are any indication.

Whereas the past few months have seen numerous companies go for the kill
by dramatically raising their offer prices on the eve of the IPO, none
of the five Internet companies that went public last week priced shares
beyond their respective proposed ranges.

The highest pricing was by Online Resources & Communications, which
offered 3.1 million shares at $14 each. The maker of e-commerce systems
for financial institutions also had the worst debut of the week,
finishing trading on Friday at $14.06, a mere 0.4% increase over its
offer price.

Online broker Wit Capital Group, meanwhile, priced its 7.6 million
shares at $9 apiece, and closed trading at $14.88 for a week’s-best
showing of 65% above the offer price.

On average, the five companies (four of which went public on Friday)
managed a first-day performance of only 44% above their respective offer
prices, well below May’s 59%, the lowest monthly average of the year by
far. (See the June 1 StockTracker
Daily
.)

Way back on March 19, women-oriented Web portal iVillage shocked the
market by boldly – some say greedily — pricing shares at $24, double
the low figure in its $12-$14 proposed range cited in a Feb. 24 filing
with the SEC.

iVillage wasn’t the first Internet company this year to price shares
well above the original proposed range – pcOrder.com priced at $21 per
share on Feb. 26 less than three weeks after an SEC filing indicated it
would sell shares between $11 and $13.

But the iVillage pricing, coming as it did at the height of the
early-spring Internet IPO frenzy, kicked off a run of $20-plus pricings
from a number of companies, including:

March

MiningCo.com (now About.com) — $25 offer price ($12-$14 initial
proposed range)
OneMain.com — $22 ($18-$20)
Autobytel.com — $23 ($16-$18)
Critical Path — $24 ($9-$11)

April

Rhythms NetConnections — $21 ($15-$17)
Value America — $23 ($15-$17)
Usinternetworking — $21 ($11-$13)
Iturf — $22 ($10-$12)
WorldGate Communications — $21 ($12-$14)
Launch Media — $22 ($12-$14)
Marimba — $20 ($13-$15)

May

Flycast Communications — $25 ($15-$17)
Scient — $20 ($11-$13)
NextCard — $20 ($14-$16)
eToys — $20 ($10-$12)
DLJdirect — $20 ($18-$20)

This kind of aggressive pricing makes sense in a hot market because it
plays into, and builds upon, the investor feeding frenzy. If traders are
looking for the next big winner, pricing high may well persuade them
that your company is it.

That strategy worked well for iVillage, eToys, Rhythms NetConnections
and Marimba, which all placed among the top 10 Internet IPOs so far this
year in terms of first-day closing price relative to offer price.

In a down cycle, however, setting a high offer price can scare away
newly skeptical investors who are focusing more on value than market
momentum. EToys pulled it off when its stock debuted on May 20, but only
because it stood head-and-shoulders above other Internet IPOs during
that time frame in terms of name recognition.

There are no such marquee companies on the near horizon. So unless the
market turns around soon, it is unlikely we will see $20-plus pricingover the next few weeks.


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