A Blip Or A Bad Omen?

A big Net IPO sags as investors turn skeptical

More than 700 cyber power-brokers packed Amsterdam's Okura Hotel ballroom on Mar. 18 to celebrate Europe's biggest and most hyped Internet initial public offering, the sale of $2.9 billion worth of shares in the Netherlands' World Online International. Tuxedoed waiters uncorked champagne. Huge buffet tables groaned with sushi, smoked salmon, and caviar. Joe Cocker and Gloria Gaynor appeared in person to belt out their favorite tunes. When Gaynor sang her emblematic hit, I Will Survive, World Online's founder and Executive Chairman Nina Brink took to the stage to dance.

Brink will need to take to heart the song's tough lyrics. Her bravado has done little to stem what's shaping up as the first rout of a major Internet IPO in Europe. On its second day of trading, WOL tumbled 16% below its listing price of $42. And the fall didn't stop. By Mar. 22 the stock was trading at $31. Suddenly, the 46-year-old Brink, an outspoken entrepreneur who dreams of turning her Amsterdam-based Internet service provider into Europe's America Online Inc., is providing the Continent with an object lesson in what happens when boundless dreams encounter newly skeptical markets.

GOING SOUR? Europe's love affair with the Net is entering a new phase. Over the last year, investors have tripped over each other to buy a tiny supply of European Internet stocks. This frenzy drove pioneers such as Britain's Freeserve, Italy's Tiscali, and Spain's Terra Networks to dizzying valuations. Now, as Europe readies for a spring parade of huge IPOs, from Deutsche Telekom's T-Online to the Netherlands' cable leader Chello, investors are starting to come up with tough questions. "People are suddenly asking, `Are these things overpriced?' and `Is this all hype?,"' says Erwin van Zuidam, an Internet analyst at MeesPierson Investment Bank in Amsterdam. Internet companies can no longer afford to make tactical mistakes in their offerings or get greedy over the price.

WOL did both. The IPO took place in a week during which tech stocks and just launched European Net stocks such as lastminute.com and Stepstone were getting pummeled. Brink and her bankers, led by Goldman, Sachs & Co. and ABN Amro, were lulled into complacency because their issue was 21 times oversubscribed. What's more, they valued each of WOL's 1.9 million subscribers at a heady $6,500. By contrast, France-based ISP LibertySurf, which did an IPO the day before WOL's, valued its subscribers at less than $3,000 each. Six days after its debut, LibertySurf shares were trading at 50% above issue price. Says Michael Kraland, president of Trinity Capital Partners in Paris, who signed up for 1,000 WOL shares and sold them on the opening bell: "This was a story of greed if I ever saw one. This is a blow for the hot air market."

The frostier climate likely means that bankers will be paring back issue prices for IPOs and releasing smaller lots of stock. And for Nina Brink, who spent millions on an ad campaign starring Christopher Reeve to build her brand, Europe's new skepticism demands nothing more than a grueling new battle to prove that her goal of building a Continentwide ISP is more than a dream.

Such a predicament seemed remote when a confident Brink and her coterie of bankers and executives launched their road show on Mar. 1 in the provincial Dutch city of Deventer. There, eager investors crammed into all 2,000 seats of the municipal theater. The lights dimmed. A slick ad, "One Day," a hymn to global communication narrated by Reeve, shone on the movie screen: For the next fortnight the ad would saturate European theaters and TVs. "This is that day," said Brink as she took her place on the stage. Given financing, she said, WOL had a fighting chance to become Europe's answer to AOL.

Why? In a Continent full of national champions, the four-year-old WOL was the first to cross borders. By raising billions in a public offering, Brink would have a war chest to build up content and buy local ISPs across Europe.

The audience responded with a standing ovation. Most hadn't really needed to listen. Their main concern wasn't WOL's business plan, but simply whether they could participate in what looked like a slam dunk. "I would like to buy 100 shares, but I'm pretty sure I'll only get one," complained Hans van de Water, a schoolteacher.

The show done, Brink and the bankers exulted backstage. "There is tons of demand and only a few Internet stocks on the market here in Europe," said ABN Amro's Adriaan Wijt, who organized the Deventer show.

Afterward, in her private jet flying to London, Brink sipped a glass of St. Emilion with satisfaction. This daughter of Dutch Jews had come a long way fast. Although her parents escaped the Holocaust because they lived in Indonesia, the Nazis killed the rest of her extended family. Her father died when she was 16. Just out of college, she started a company importing Epson printers and National Semiconductor chips. "I made my first $30 million by the age of 30," she said. The offering, she added "is not about money. I already have everything I need." What Brink wanted was recognition as a master creator of the European Net.

Brink got the idea to launch WOL in 1996 when she advised the Dutch government on telephone deregulation. "I saw that Europe was going to free its telephone market, and it didn't take a genius to see that the Internet was going to become a big business," she says.

But it did take insight to build her company. When other European Internet providers began offering their services free in 1998, she stopped charging subscribers a monthly fee, relying instead on her share of phone charges paid by subscribers who go online. In contrast, AOL Europe tried to keep its fee system and its growth stagnated. WOL caught up fast and now has 1.9 million customers in Europe, just behind AOL's 2 million.

Brink also chose different local partners in each European country, while AOL was hamstrung by having a single deal with Germany's Bertelsmann, a handicap in entering non-German markets. In France, for example, she edged out local competitors such as Bernard Arnault's LibertySurf and Jean-Luc Lagardere's Club Internet to strike a deal with conglomerate Bouygues, which owns a mobile phone operator and the country's leading TV station, TF1. Such acquisitions help provide WOL with the programs and exposure it needs to make the jump from an ISP to a content provider like AOL.

SELL IT FAST. But the company does have important weaknesses. Its 1999 revenues totaled a scant $64 million, while net losses reached $88 million. More important, while WOL is a giant in the Netherlands, it's a pygmy elsewhere; it's not even among the top five in France, Germany, and Italy. And competitors such as Deutsche Telekom, France Telecom, and Telefonica ruthlessly have exploited their near total control of local phone service to give customers of their own ISPs cheaper phone charges or faster data connections. Most worrying of all, Brink cannot tell investors when the company might be profitable.

No matter. The market was telling Brink to go public fast. In October, 1999, an Italian ISP startup, Tiscali, with about the same number of subscribers as WOL, went public and the market value of the company quickly tripled, to $13.6 billion. The next month, Spain's Terra Networks saw its newly listed stock quadruple within days, pushing the value of the company up to $28 billion.

American investors perked up. "Terra was like an earthquake," says Lawrence Goldfarb, a managing principal in San Francisco's BayStar Capital, who is setting up a $500 million fund with Brink to invest in European Net startups. Another important American vote of confidence came from Intel Corp., which invested $67 million for a 10% stake in WOL last June. "We were looking for deals to do in Europe, and Nina impressed us the most of all the entrepreneurs we met," says Avram Miller, Intel's former director of corporate business development. Miller, now a director of Boston-based Internet investment company CMGI, serves on WOL's supervisory board.

But by the time Brink was ready to launch her IPO on Mar. 17, the market's mood had started to sour. Bad news piled up in the days leading to the launch. First, investors fled America's Nasdaq. Then AltaVista Co. announced it was introducing flat-rate, unlimited Internet access in Britain. This threatened to punch a hole in WOL's business model; a hefty chunk of the company's 1999 revenue depended on subscribers' willingness to pay by the minute for time spent online.

CEO Simon Duffy maintained that WOL would be able to make up for these lost revenues by focusing on e-commerce and advertising. But that would take time, and investors worried about a short-term loss in sales. When Brink showed up at the Amsterdam Stock Exchange at 11:45 a.m. on Mar. 17, business students dressed as clowns were demonstrating outside. They handed her the "Golden Bubble" Prize. "She is selling hot air," insisted their leader, 20-year old Daniel Simons.

Brink and her bankers remained confident. The night before, they had chosen the top price of their listing range. They could have priced it at $36. Instead, they listed it at $42 a share, valuing the company at a whopping $12.2 billion. After all, the transaction was 21 times oversubscribed. In pre-launch trading in London's "gray" market, WOL shares were going for upwards of $72.

The opening ceremony went as planned. Amsterdam Exchanges President George Moller called it an "historic day," the exchange's largest-ever IPO. The only other time so many television cameras entered the exchange was for the introduction of the euro. Veuve Amiot champagne was uncorked. At 12:30, applause greeted the opening price--$50. Brink did a few TV interviews and left for lunch.

Then bedlam erupted. So many sell orders piled in that trading had to be suspended three times. By 1:20 p.m., the stock was down to $46. "We were eating lunch, and they kept closing the exchange down," Brink told BUSINESS WEEK. "None of my institutional investors could get in their buy orders." The Amsterdam exchange had never experienced such a large listing and was unable to process the flood of trades. Some 57 million of the 64 million new WOL shares were traded on the first day. "This is a new world for us," admits exchange board member Rudolf de Soet.

In retrospect, Brink and her bankers may have made an error listing only on the Amsterdam bourse. Under Dutch securities regulations, World Online had to unload at least a hefty 20% of its stock on the first day. Most successful U.S. Internet listings sold off much smaller parts of the business on Nasdaq in order to ensure a first day "kick." But Brink thought there was enough liquidity to do a big IPO in Amsterdam. "There has been so much demand in Europe that it was not necessary to go to the Nasdaq," she says. She only did a small private placement in the U.S. to "attract some sophisticated [institutional] investors."

WHOM TO BLAME? At the party the following evening, the World Online team put on a brave face. Brink stayed drinking and dancing into the early morning hours. After all, her four-year-old company had sold an astounding amount of stock. And the whole company is still worth more than established Dutch multinationals such as national carrier KLM Royal Dutch Airlines, telephone company KPNQwest, and publisher Elsevier. "How can you raise so much money and not call it a success?" asked an exhilarated Brink.

But recriminations lurked just below the glittering surface. Brink blasted the Amsterdam Exchanges' inability to process the trades. Others blamed Goldman Sachs for mispricing the deal and rubbing investors the wrong way. Richard A. Murley, Goldman's lead banker on the deal, did not attend the launch party, citing family reasons. Goldman Sachs blamed the downturn on the overall tech and Internet market on both sides of the Atlantic.

World Online's shaky introduction could be a mere blip, soon forgotten, on the way to Europe's construction of a New Economy. The stock could bounce back, and Nina Brink could continue unhindered with her plan to create Europe's answer to America Online. But for the foreseeable future, she will have to rein in her ambitions--and with them, Europe's hopes of an unending rise in the Internet stock boom.