CurrentOfferings.com Story:

Tech IPOs show big gains

by David Shabelman, The Deal, Nov 12, 2004

Quick, name the Internet search company that went public this year that has enjoyed the biggest gain in its stock price. If you guessed Google Inc., guess again. The right answer is Interchange Inc., whose shares have risen an astounding 195% since the Laguna Hills, Calif., paid-search provider make its market debut in October.

Granted, Interchange is riding hard on the coattails of Mountain View, Calif.-based Google, which went public in August and whose stock has more than doubled from its $85 initial public offering price. But the early success for Interchange, which is marginally profitable, also reflects the miniboom among small-cap technology companies showing strong after-market returns.

Other fast starters in this group include online retailer eCost.com Inc. of Torrance, Calif., whose shares are up 180% since the company's August IPO; on-demand software provider RightNow Technologies Inc. of Bozeman, Mont., up more than 150% since it debuted in August; tech consulting firm Kanbay International Inc. of Rosemont, Ill., up 100% since July; semiconductor chip manufacturer Volterra Semiconductor Corp. of Fremont, Calif., up 140% since going public in July; and fundraising software maker Blackbaud Inc. of Charleston, S.C., which has gained 80% since a July IPO.

It's been a good, but not outstanding, year for IPOs. Roughly 182 companies have gone public in 2004, excluding foreign issues, compared with 86 offerings in 2003 and exceeding initial industry expectations of about 150 offerings. At this time last year only 51 companies had gone public; in October, 34 deals were priced, the most since August 2000, when 60 companies went public. By comparison, there were 470 offerings in 1999 and 756 in 1996.

But it's clear that Google's phenomenal debut, along with the attendant tide of publicity, changed the psychology of the market, returning a sense of optimism unseen since the irrationally exuberant days of the tech bubble.

According to New York-based Thomson Financial, the average stock gain for the 130 IPOs that went public this year prior to Google's IPO is 18%. The shares of the 51 companies that went public after the search giant's debut are up an average of 27%.

"Google's success signaled investors to jump in, the pool's open," said Richard Peterson, chief market strategist with Thomson Financial.

Smaller companies have been among the biggest beneficiaries of the renewed enthusiasm in IPOs.

Tom Taulli, co-founder of CurrentOfferings.com, a Web site that tracks IPOs, said many companies that came out before Google were attractively priced to stimulate investor interest and offered few shares because of the modest demand. Now that IPOs are surging, companies with small floats can rise quickly.

Interchange has a float of 2.8 million shares, eCost's float is 3.4 million shares, and Volterra's is 4.5 million shares. By comparison, a company such as Yahoo! Inc. of Sunnyvale, Calif., is floating 1.2 billion shares, limiting major price swings.

"It doesn't take a whole lot in these small IPOs to move the stock significantly," said Chris Allick, managing partner at boutique investment firm Instream Partners in San Francisco. "If there are buyers buying a couple hundred thousand shares a day, chances are the stock is going to go up a lot."

Taulli said day-traders are responsible for much of the movement in small-cap stocks, noting that the small float for such companies makes it easier to manipulate share prices. A spike last week in the stocks of gay- and lesbian-themed Web site PlanetOut Inc. of San Francisco and wireless product maker InfoSonics Corp. of San Diego just ahead of their earnings reports is a clear indication of the kind of "pump-and-dump" tactics favored by day-traders, he said.

"The day-trader is back," Taulli said. "This is classic momentum player, day-trader buying."

Also, while corporate spending on technology has been tepid in the second half of the year, many of the companies going public today often have innovative products in high-growth sectors. Salesforce.com Inc., for example, a San Francisco-based vendor of customer relationship management software that went public earlier this year, offers a new way to deliver and market a product. Blackbaud, meanwhile, is the pre-eminent provider of software for nonprofit companies.

"You can make the argument that there are good fundamentals for these companies because they can get into markets that the larger companies can't get into," Taulli said.

The success of such companies is certain to encourage more small-cap tech players to try their luck in the public markets. "If I had a company that was either in [IPO] registration or could get into registration quickly, I would expect them to get in," Allick said.

Taulli said he expects a handful of offerings in the next few weeks before the market goes on hiatus for the holidays. As long as the equity market remains healthy, the first part of next year should see a surge of IPOs.

"Bankers are great at creating supply," he said. "We'll see a lot of registrations. It could get saturated very quickly, but we should see a strong performance in the first half of 2005."