The IPO Is Back

After several years of absolutely putrid conditions for companies to come public, the window for initial public offerings (IPOs) has cracked open. Whether this is a good thing ultimately depends on the public's ability to take these things in stride. At least today's IPOs don't resemble the notorious Class of 1999 -- and that is a good thing.

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By Bill Mann (TMF Otter)
July 22, 2003

That resonant hum you hear is the sound of the IPO machine cranking up. It's been more than three years in cold storage, then off to the shop for a complete overhaul. And good thing: The damage inflicted by the excesses of the late 1990s was so extensive, so debilitating, that chief mechanics on the scene nearly suffered nervous breakdowns.

In 1998, the IPO suffered the culminating shock in a sweeping tectonic shift. That was the day theglobe.com (OTC: TGLO.OB) hit the market and launched 854% in a few hours' trading. Theglobe.com wasn't some incredible business -- the founders didn't really have much of a plan at all. There was no brand spanking new business model, not even a clear path to making money. And yet speculators, who had watched moonshots eBay (Nasdaq: EBAY), Yahoo! (Nasdaq: YHOO), Netscape, and Amazon (NYSE: AMZN) skyrocket in their first days of trading, leapt right in.

A clear message rang out across Wall Street: Internet companies may have no chance of making any money, but their IPO's sure as heck did.

The Motley Fool was fairly ruthless in its criticism of most of these IPOs, and we urged investors to steer clear -- that most new issues would end in sadness and destruction. We still believe this as a general rule. What stood out most about the late 1990s was the condition of the average company making its debut: For the first time in recent memory, underwriters were hoisting extremely immature concepts on the public.

Before long, venture capitalists coined a new term for IPOs: "Liquidity events." This was code for that precise point at which insiders get filthy stinking rich, gorged on the public's insatiable desire to get in on the ground floor of the next big thing. And indeed, while this turned out badly for outside investors, for those who managed to bring e-Doilies.com public, it worked out quite well.

The current crop of companies going public offers much greater cushion from the standpoint of business stability. Even the vaguely dotcomm-y sounding iPayment (Nasdaq: IPMT) had revenues measured in the hundreds of millions before it went public in May. Other recent IPOs include Digital Theater (Nasdaq: DTSI), which offers digital audio products, and DVD software provider InterVideo (Nasdaq: IVII), both of which, while speculative to be sure, are at minimum, real companies.

In the aftermath of the great bubble, the types of companies being brought public are of a decidedly higher caliber. This has been the case over the last two years, with newly public companies like Dick's Sporting Goods (NYSE: DKS), Overstock.com (Nasdaq: OSTK), PayPal (now part of eBay), and Netflix (Nasdaq: NFLX) all having charmed us with their wares. None of these shared much in common with the average IPO of four years prior, with the exception, of course, of the "IPO" part. Dick's, for example, is more than a half-century old. These might be hidden gems inside the market, but get-rich-quick schemes they are not. (If you're in search of smaller companies with big payoffs, you might like a free trial Tom Gardner's Motley Fool Hidden Gems).  

Has everyone gone public?
One might be excused for wondering who's left to go public. But indeed, not all of the great corporations of the world are traded publicly. In the U.S., engineering giant Bechtel is private, as is agricultural behemoth Cargill. Investors would likely jump at the opportunity to buy either. Others, like Cargill and Bechtel, are held privately and simply not interested in change. And you can bet there are some we'd like to see hit the Street. I polled a few folks and came up with the short-list.

Google
The great thing about Google is that there's a pretty good chance it could go public in the not-so-distant future. Google now accounts for nearly one-third of all Web searches -- eclipsing Yahoo! and Microsoft's (Nasdaq: MSFT) MSN. Like all private companies, Google doesn't have to discuss its financial performance, but people in the know peg its revenues at about $1 billion per year, and claim that it is profitable. While it might be great to see Google go public, I would stay far, far away from it as an IPO. It's likely to be one of the most anticipated in history, which means that there's a pretty good chance that its price would come unhinged from the value of the company.

SAS
One of the largest business intelligence providers in the world, Cary, North Carolina-based SAS toyed with the thought of going public a few years ago, thinking that the media exposure of a publicly traded stock might enhance business. This line of thinking was rightly quashed, and SAS goes on its merry way as a privately held juggernaut. The company does provide some financial information -- $1.18 billion in revenues in 2002, 4% higher than the previous year. Yep, in a miserable tech environment, SAS managed to grow.

Edward Jones
The thinking man's brokerage. In 1999 St. Louis-based Edward Jones sent letters to each of its 2.3 million clients warning them about investors' increasingly unrealistic expectations for market gains. In an environment where brokerages stand ready to sell anything people might buy, Edward Jones is different, and as a result, its customers remain extremely loyal. That's a good thing.

Mars
Mars Bars. Three Musketeers. Snickers. Skittles. Whiskas (you know, for the cat.) Mars is an intensely private, but unquestionably successful food and candy maker, with estimated annual revenue of $17 billion. I'm not sure how I feel about those psychedelic M&M's, though.

Soma Networks
Soma offers Wi-Fi solutions to local communications providers. Yeah, yeah, we've heard it all before. But Soma's technology offers a substantially wider coverage area from a single-base station (as much as 30 square miles), and does so with non-line-of-sight capability. You think that being able to fire up the old laptop at Starbucks (Nasdaq: SBUX) is cool? Try being able to do it anywhere in Pittsburgh.

With less than 20 companies currently in the IPO pipeline (sadly, none of our favorites has filed to go public), hopes of an "IPO resurgence" are likely to be unmet. However, given the damage inflicted by the overblown IPO market the last time around, we'd be hard pressed to call this a bad thing for investors. We'd much rather that companies fail to go public at all than plow through an IPO only to destroy investors' hard-earned money.

Bill Mann likes searching for Hidden Gems inside the market. He does not own any of the public companies here, but might like to own a few of the private ones. The Motley Fool is investors writing for investors.