webMethods' IPO Soars

By Dave Marino-Nachison (TMF Braden)
February 11, 2000

I first heard of webMethods Inc. (Nasdaq: WEBM) when VerticalNet (Nasdaq: VERT) President and CEO Mark Walsh mentioned it in passing in a June StockTalk interview -- and then it slipped into the recesses, so to speak, of my mind.

I should have done more reading. The company went public today, selling 4.1 million shares for $35 apiece after repeatedly upping the price because of expected demand. How much demand? Trading opened today at $195, a rise of approximately 460%. It's a good thing the company raised that IPO price; previous estimates indicated that the shares might have come to market for as little as $11 each.

Before we get into what might have driven webMethods' stock up so high by tea-time, let's revisit a recent Fool on the Hill column that adds some useful perspective to the IPO process besides the obligatory "Did you see that?" Keeping in mind that the reason companies go public is to raise cash to fund their growth and operations, it's worth noting that by setting webMethods' offer price at $35 instead of the $195 the market was willing to bear, the company's underwriters essentially cheated it out of a cool $656 million.

That's because the spread between IPO price and open price goes not to the company but to the underwriters -- in this case Morgan Stanley Dean Witter (NYSE: MWD), Merrill Lynch (NYSE: MER), Dain Rausher Wessels (NYSE: DRC), and Friedman Billings Ramsey (NYSE: FBR) -- and their clients. (If webMethods went public at $11? Another $100 million down the drain.) Maybe that's why one Foolish columnist suggested considering investment banking stocks earlier this week.

Now let's take a look at the webMethods story, since you're very likely to hear it and others like it quite a bit in days to come. The company markets business-to-business software using the XML language to exchange information and transaction data between companies, customers, suppliers, and other partners over the Internet to smooth out their relationships.

The key is the XML language, essentially an alternative to HTML and what got Walsh interested in webMethods in the first place and, by way of another example, CheckFree (Nasdaq: CKFR) interested in BlueGill. Increasing the ease of data exchange over the Web, said CheckFree COO Pete Sinisgalli in December, is what will really accelerate the growth in and usefulness of B2B software.

There are a host of online resources to help you understand how XML works, but here's a link to a tutorial almost Foolish in its clarity provided by IBM (NYSE: IBM). "Because different organizations (or even different parts of the same organization) rarely standardize on a single set of tools," it reads, "it takes a significant amount of work for two groups to communicate. XML makes it easy to send structured data across the Web so that nothing gets lost in translation."

In other words, XML gives data elements more meaning so computers can easily relate them to each other. HTML, meanwhile, gives it form.

"When using XML," the tutorial continues, "I can receive XML-tagged data from your system, and you can receive XML-tagged data from mine. Neither of us has to know how the other's system is organized. If another partner or supplier teams up with my organization, I don't have to write code to exchange data with their system."

The financial side of the story is a familiar one: rapidly rising revenues and losses as the company fights to establish its business, which is currently supported entirely by software license revenue. webMethods, though, now can attack the market with an IPO's ransom in cash. As much as it could have? That's another story.

Related Links:
webMethods Web site
IBM developerWorks: XML
Fool on the Hill, 2/7/00: Investment Banks in a League of Their Own
Fool on the Hill, 1/12/00: Are Hot IPOs a Good Thing?
Fool Plate Special, 12/21/00: CheckFree Catches a BlueGill

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