More Internet Ipos, Anybody?

A second wave is coming, but investors are more chary

Behind Howard S. Jonas' scuffed metal desk is a poster for the movie Field of Dreams--about a man who builds a ball field in the middle of nowhere in the belief that "if you build it, they will come." Jonas is chief executive of IDT Corp., an Internet company in Hackensack, N.J. Instead of a ballpark, Jonas is pinning his hopes on the vastnesses of the Internet--and an inch-thick document on his desk. It is an initial public offering prospectus.

Jonas is betting investors will flock to his stock offering--and he's not alone. Yep, they're back. Internet IPOs, the fuel that stoked the fired-up stock market of 1995, are about to make another charge through Wall Street, despite the recent poor performance of Net stocks. The Interactive Week-American Stock Exchange Internet index, which gained some 130% in 1995, has declined 10% since its peak in early December as investors began to focus on superhigh valuations--and mounting competition--among such hot Net stocks as Netscape Communications, Netcom Online Communication Services, and PSINet.

But even as share prices soften, the dealmaking continues to be intense--and the effect will be seen on the Street in coming weeks and months. The new crop of stock issuers include Jonas' IDT, an Internet services provider and discount telephone company; CyberCash Inc., which provides security for online transactions; Raptor Systems, a maker of antihacker software; and VocalTec Ltd., an Israeli company that is pioneering in the potentially explosive field of voice communications over the Net.

All have registered IPOs with the Securities & Exchange Commission in recent weeks, and others are expected to join them soon. The fate of these IPOs, however, is far from certain. They stand a good chance of being rejected by an increasingly chary market that is unlikely to produce another Netscape--which went public at 28 in August and hit 171 in early December before falling to 140 or so. Even worse declines were suffered by Netcom, UUnet, and other Internet service providers--companies that hook people up to the Net.

HUMMING. The service providers are easily the most competitive sector of the Internet business, with hundreds going head-to-head nationwide. But that has hardly discouraged investment bankers such as Cowen & Co., which is bringing IDT public, Hambrecht & Quist, Montgomery Securities, and Morgan Stanley, all of which are actively courting Net companies. Yahoo! Corp., which publishes an online guide to Web sites, is one of the companies that is believed to be heading toward a stock offering, and so is Lycos Inc., a Web-page search service and subsidiary of CMG Information Services. "Everybody wants to give you money," says Bill Pendley, chief financial officer of Digital Express Group, a privately held internet provider in Beltsville, Md.

Why are Internet IPOs picking up despite the malaise among Net stocks? Some of it is, of course, old-fashioned transaction hunger among investment bankers. The Internet IPOs were among the most successful stock offerings in recent history, in terms of both commissions and aftermarket performance. And there is a corresponding hunger for capital among Net service providers, which are growing at an astounding rate. According to Morgan Stanley & Co., the number of customers of the Internet-only services has grown nearly sixfold--from 92,000 to 523,000--in just the past year or so. Most Net providers have raised capital mainly through bank borrowing and venture capital. Digital Express, for example, has gotten funding from Venrock Enterprises--the Rockefeller family's venture-capital outfit--while IDT drew the interest, and cash, of money manager Mario Gabelli.

A good example of the evolution of these companies is provided by IDT, which plans to sell 4.6 million shares and raise $40 million or so in its IPO. IDT is a comparative old-timer in a business where companies often have a year or less of operating history. IDT, which stands for International Discount Telecommunications, began life five years ago in a former funeral home in the East Bronx, offering discount trans-Atlantic telephone service. Jonas moved to Hackensack in 1992 and was one of the first Internet-only service providers. The 39-year-old, sneaker-clad Jonas claims some 50,000 customers nationwide--which would make his company about as big as PSINet and about a fifth the size of Netcom.

IDT still gets about two-thirds of its $40 million annual revenues from its phone business, but it is the Internet that is the biggest source of potential growth--and expense. Expansion is the strategy of aggressive Net operators like Jonas, and it is expensive. Each account brings in about $30 a month, and it can vanish like the wind--Internet customers are notoriously fickle. Jonas notes that it costs him some $150 to take on a new account--half in marketing expenses, half in new equipment. For example, a high-grade modem, costing upwards of $400, must be bought for every 15 new clients. So if IDT were to expand by, say, 20,000 new clients, it would require some $3 million--and that would have to come from somewhere. "In a way, Wall Street determines who will be the big players," Jonas says.

SEARCH AND DEPLOY. One Internet company itching to become a big player is San Francisco-based c/net Inc. That's c as in "content"--which is what distinguishes it from other Internet ventures that have gone public. The three-year-old company's game plan is to provide a Web page that people eventually will pay for--either as subscribers or advertisers. c/net is headed by two former college roommates, CEO Halsey Minor and CFO Shelby Bonnie, who was managing director of the Lynx Partners venture capital fund at Tiger Management Corp., headed by famed investor Julian H. Robertson Jr. c/net hosts a show about the Internet on the USA cable network, and its seven-month-old Web site provides, among other things, an easy method of searching for and downloading thousands of shareware files--free or low-cost software--scattered around the world but accessible via the Internet. A c/net official says talks have been held with Morgan Stanley, though Bonnie says there are "no current plans to go public."

If c/net stays private, and some other IPO plans fall through, it will be good for the survivors. "If you get too many of these Internet IPOs, you could saturate the industry," observes Arthur Bonnel, portfolio manager of the Bonnel Growth Fund. That would add to the downward pressure on Internet stocks.

Jonas has another poster behind his desk: Man of La Mancha. Is Jonas tilting at windmills--or will investors flock to IDT as they did to Netscape and Netcom? Investors have short memories--and for the ones who bought Internet stocks at their dizzying highs, they are crummy memories indeed.