NEW YORK (Dow Jones News) -- After an unprecedented run for initial public offerings in 1999, expect more of the same in 2000.
With the new-issues market ending last year on a high note, most analysts believe all of the themes that have contributed to the beautiful music will continue at least into the first part of this year."This is just a sound, strong market that has been incredibly durable," said Paul Grangaard, director of investment banking at U.S. Bancorp Piper Jaffray in Minneapolis.
That's not to say new issues won't face hiccups this year. IPOs in 1999 were helped by a strong run in technology stocks, as best shown by the meteoric rise in the Nasdaq Composite Index. But the new Nasdaq highs, coupled with the extraordinary valuations given to IPOs, are almost certain to prompt a correction, said Charles Pradilla, chief investment strategist at SG Cowen Securities Corp. in New York.
But it most likely will be temporary since there is "a recognition that the Internet is a commerce-transforming event that will change the world," Pradilla said. Because of this, demand for new Internet issues will continue to be strong, he said.
That bodes well for the IPO market, which has been driven almost exclusively by Internet-related stocks. Even last year's biggest offering, from United Parcel Service Inc., was viewed by many as a play on the Internet because of its position as a major shipper of goods ordered online.
But simply being an Internet company won't guarantee success. Business-to-consumer companies, known commonly as "e-tailers," were among the biggest disappointments of last year, as seen in the struggling share prices of companies like sports retailer Fogdog Inc. and 1-800-Flowers.com Inc. Even if the holiday-shopping figures show a tremendous rise in online sales, new e-tailers will continue to get a lukewarm reception, analysts said.
On the other hand, business-to-business Web companies should continue to be among the best received new issues. "The model of selling goods between businesses over the Internet looks much sounder right now than the selling-to-consumer model," U.S. Bancorp's Grangaard said.
Internet infrastructure companies are expected to continue to shine. Related to this, analysts said, will be the continued strength of telecommunications companies, notably the expected spinoff of AT&T Corp.'s wireless operations.
Other spinoffs are also expected to garner attention, including offerings from 3Com Corp's Palm Inc. handheld computer operations and CMGI Inc.'s AltaVista search engine.
New genomics and biotechnology companies could also do well in the new year, though to a lesser degree than Internet-related issues.
Investors will have their hands full. The last two weeks of 1999 brought a flurry of IPO filings -- one of the busiest periods in some time -- indicating a crowded calendar for 2000. But late 1999 was also a busy period, and investors didn't seem bothered by the volume. "The new-issues market has shown an incredible capacity to absorb the amount of paper" brought last year, said Andy Fisher, managing director, equity capital markets, at Credit Suisse First Boston in Palo Alto, Calif.
Of bigger concern is the effect that last year's new issues will have on the new crop of 2000. While stellar first-day gains for new stocks were commonplace, actual pricings of IPOs were rather modest, meaning the companies themselves were taking less of the proceeds from their offerings.
Given that most new issues are money-losing operations that burn cash, many of these companies have to tap the market again in secondary offerings close on the heels of their IPOs. Already, companies that soared when they opened in late 1999, like Red Hat Inc. and PurchasePro.com Inc., have announced plans to unleash more shares on the market through follow-on stock offerings in early 2000.
This secondary volume could put some pressure on new issues. "The risk is going to be to handle not the IPO calendar, but the secondaries that everyone wants to do," Fisher said.
The stock performance of last year's IPOs will also be viewed as a gauge of what kind of multiples investors can expect from the 2000 group. While such performance is strong now, many analysts believe there will be some pressure on these stocks this year.
The hot offerings from 1999 have received lofty valuations mostly because investors chose to ignore the lack of earnings they bring, focusing instead on the potential these companies have.
This year, that attitude should change, U.S. Bancorp's Grangaard said. "Through the year, you're going to see people stop paying for the promise and start paying for the performance," he said.
Such an approach could change the current eagerness to drive up the valuations of new stocks in their first few days, Grangaard said.