E-Commerce IPO Market Falls to Earth

E-commerce companies that are looking to go public can still raise money in current market conditions, although recent events suggest that these firms may not be able to get the sky-high prices for their shares seen just a couple of months ago.

Companies that sell to consumers have been particularly hard hit of late, as high stock prices and rosy forecasts about potential market share have been offset by more immediate concerns about cash flow problems and high burn rates. Most notably, former high fliers Peapod, Inc. (Nasdaq: PPOD) and CDNow, Inc. (Nasdaq: CDNW) have said that they would soon be out of business unless investors or merger partners could be found.

Meanwhile, many investors are turning away from the companies, which have seen revenues rise but are still unable to turn a profit or even meet costs. Adding to the jitters are worries about the health of the stock market in general, and Internet stocks in particular.

“B2C dried up even before the stock market crashed,” said Jeff Hirschkorn, senior analyst at IPO.com. “Right now, the fascination is with B2B stocks.” Pets.com, Inc. (Nasdaq: IPET), which went public in February at $11, briefly rallied to about $14, and now trades just above $3, is a primary example of how interest has cooled.

B2B Companies Need to Show Value

Still, even business-to-business IPOs are not as sure a bet as they were a few months ago, and many analysts are saying that companies will have to show their worth in order to find investors.

According to Ulric Weil, an analyst at Friedman, Billings, Ramsey & Co., “If they’re not of quality, but just a gleam in somebody’s eye — which has been OK up to now — they may have a hard time.”

“In general, the business-to-business market has more promise than business-to-consumer,” said George Nichols, IPO and Internet analyst at Morningstar, Inc. “But business-to-business stocks are getting whipped.”

Nichols added that stocks of B2B “enablers” — companies that provide marketplaces for others to buy, sell and trade — are falling out of favor amid a saturated market and the entrance of old-line, brick-and-mortar companies into the e-marketplace. “In many of these industries, the old-line companies only want the software to start the exchange,” he said.

Many e-commerce stocks that have gone public this year are trading at levels below their initial offering prices. “Internet stocks are going to be valued,” said Hirschkorn. “When they used to debut, there was no way you could value the company; now you can.”

Next Week’s Action

Hirschkorn likes two issues due out next week. The first, iSky Inc., plans to sell five million shares at a price between $11 and $13 each through Chase H&Q.

The company, which aims to help e-business and traditional companies interact with their customers, is “interesting” because it’s “like an online customer support company,” Hirschkorn said. iSky also has some heavy hitting investors. Internet Capital Group will hold a 35 percent stake after the IPO, and GE Capital also holds an interest.

Nuance Communications is another issue that could do well, according to Hirschkorn. The company will sell 4.5 million shares at $14 to $16 each through Goldman, Sachs & Co. Goldman also holds a stake in the company, as does Cisco Systems.

A Rough Summer

In general, the coming months “should be pretty rough for technology IPOs,” said Morningstar’s Nichols. “The technology equity markets tend to hibernate in the summer.” In the meantime, he said, strong earnings from big high-tech companies “will help keep IPOs from plummeting in the short term.”

One IPO that has done well is about as far from e-commerce as it is possible to get: Krispy Kreme Doughnuts, Inc. (Nasdaq: KREM), a 63 year-old doughnut-shop chain, trades above $38, up from its IPO price of $21.

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