When it comes to initial public offerings, timing is everything. This year, a handful of Los Angeles-based Internet companies learned that lesson the hard way, electing to raise cash by offering the public a piece of their businesses, only to see investors and their company’s credibility take it on the chin when the stocks went into a free fall.
Of the dozen L.A.-area businesses that issued public offerings in 2000, five are built around a particular Internet destination or provide resources for online companies. Nearly all of those companies have watched their stock dip to less than half their initial value in the weeks and months since going public. In more than one case, the devaluation has been nothing short of disastrous.
Faring better were an equal number of Los Angeles companies involved in emerging technologies. Those businesses with solid infrastructure, a steady market for their products and a history of turning profits did very well in the market.
The so-called “flight to quality” that has distinguished 2000 is a far cry from the heady days of 1999, when few dot-coms were considered too risky and the time was ripe for new companies to raise hundreds of millions of dollars by going public.
“Content comes and goes and eventually some of it will stick, but right now the cycle is returning to infrastructure,” said Gail Bronson, an independent IPO analyst in Palo Alto. “It’s now a different ball game. We’re seeing investors being very selective.”
A sign of that selectivity is the fact that there have been 50 percent fewer public offerings in Los Angeles in 2000 than there were in 1999, when 18 companies issued stock.
“The overall mood for IPOs is cautious but optimistic,” said Jeff Hirschkorn, an analyst with Los Angeles-based IPO Monitor.com. “The market right now is in limbo, but it’s not dead by any means.”
Winners going strong
One local company that saw an immediate benefit from its public offering was Century City-based gourmet pizza chain California Pizza Kitchen Inc. With its Aug. 2 offering underwritten by Bank of America Corp., Deutsche Bank and others, CPK raised nearly $80 million in its IPO. And shares that were initially offered for $15 apiece as of last week were trading for nearly $34.
Hirschkorn compared California Pizza Kitchen’s ascension to another food-related hit, Krispy Kreme Doughnuts Inc.
“Food companies are rare, but when they do come along they do very well,” Hirschkorn said. “This is a company that is destined for better results, particularly if they keep expanding.”
In general, the Los Angeles companies that were greeted enthusiastically by investors this year have been those with proven track records. Foremost among those is Capstone Turbine Corp., a Woodland Hills designer and manufacturer of microturbines.
Through its June 29 offering, Capstone raised more than $145 million, and its stock, issued at $16 a share, soared to nearly $100 a share in August before a substantial cool down. Capstone stock trading last week at slightly under $40 a share. The company is currently weighing a secondary stock offering, officials said.
Other tech-related companies that have seen their IPOs perform well s are Calabasas-based Ixia Inc., a maker of high-speed performance analysis systems, and Software Technologies Corp. of Monrovia, which makes e-business software. Ixia’s stock has more than doubled in value from its initial $13 issue price less than a month ago, and Software Technologies has seen its stock value soar by more than 30 percent since April.
One technology company that has had a volatile ride since its public stock offering is Qualstar Corp. of Canoga Park.
After delaying a planned April 13 offering the market dropped more than 500 points that day Qualstar issued its stock to the public for $7 a share on June 23. Although company officials were hoping to attract $10 to $12 a share, Chief Financial Officer Matt Natalizio said Qualstar decided to forge ahead with its IPO to fulfill a need for cash.
“Our growth rate was such that we were concerned about financing both receivables and inventory,” Natalizio said. “Initially, we were disappointed. We’ve had our ups and downs, but overall (the stock price) is moving in the right direction.”
Bronson said Qualstar’s experience is representative of other companies throughout the state that have struggled with the decision to go public in the past year. “We’re seeing a lot of deals withdraw,” she said. “The current market is very demanding.”
Disappointing performance
Several Los Angeles companies weren’t up to those demands this year, the most stark examples being ARTISTdirect Inc. and lesser-known Internet companies Rediff.com India Ltd. and b2bstores.com Inc.
An Internet site focused on India and the global Indian community, Rediff.com raised more than $55 million in its June 14 offering.
However, by Nov. 7, the stock price had lost more than 50 percent of its value and was trading at $5.62 a share.
A business development Web site, b2bstores.com issued its stock at $10 a share on Feb. 11. The price as of last week had dropped to $1.50 a share.
An even more-dire situation exists at ARTISTdirect.com, a much-hyped Encino-based Internet music company that connects artists with their fans. Despite raising $60 million in an initial public offering at $12 a share, ARTISTdirect has seen its stock plummet since April, losing about 90 percent of its value.
“The problem with ARTISTdirect was their business model was not really Internet-oriented,” Bronson said. “A weak business model is not going to win over investors in the current climate.”
For investors, there are still good buys to be had in newly public companies, according to Hirschkorn. The important thing to look for is substance behind the flash.
“You’ve got to keep an eye out. There are a lot of deals out there and you don’t want to get burned,” he said.
