Commentary: These Days, Even Stars Can Fizzle on the Launchpad

When Marc Andreessen took Netscape Communications public in August, 1995, the shares jumped 168% on the first day. Netscape's debut not only ushered in a new wave of technology, it helped spark a Wall Street feeding frenzy as investors bid up many of the initial public offerings that followed.

Now, with the markets reeling and the window for IPOs all but shut, can Andreessen do it again? Expectations are swirling around his second Internet startup, Loudcloud Inc. Many hope the widely anticipated IPO will help jump-start the market.

But with the terms now set for the deal, those hopes have taken a hit. On Feb. 16th, Loudcloud said it would offer 20 million shares--30% of the company--at between $8 and $10 per share. Management hopes to raise between $160 and $200 million.

Loudcloud's final pricing is quite a drop from its initial filing in October. Then, management planned to offer just 10 million shares--then 10% of the company--for between $10 and $12 apiece. Overall, Loudcloud has shaved its valuation from about $1.1 billion to $600 million, a 45% plunge.

BIG WINS. Loudcloud hasn't set a date for when it will attempt the IPO, although it's likely to come in the next few weeks. And its reception will offer a glimpse into how cozy investors will get with new issues for the rest of this year. The Sunnyvale (Calif.) company certainly has the sort of credentials that would have once wowed IPO investors. Aside from Andreessen, Loudcloud boasts a seasoned management team, two of the top investment bankers--Morgan Stanley Dean Witter and Goldman Sachs--as underwriters, and a handful of recent, big-name customer wins, from Blockbuster Inc. to News Corp.

Trouble is, even the Internet's poster boy may not have the clout, or the appropriate business, to inject life into the moribund market for IPOs. The 575-person outfit runs complex Web sites for other businesses, providing high-margin software, hardware, and management services. But with established players like Exodus Communications Inc. and Qwest stampeding into the same market, Loudcloud could find it hard to stand out. For the first nine months of 2000, the company booked just $6.6 million in revenues.

Moreover, Loudcloud appears a long way from achieving what many investors require in this market: profitability. It posted a hefty operating loss of $106.7 million for those same nine months. And the company gets about half of its business from dot-com clients--another no-no today.

That said, Loudcloud is hardly alone in facing a chilly reception. So far this year, just eight companies have gone public, compared with 59 in the first seven weeks of 2000. And only two of the 2001 crop was a high-tech outfit. Nor is a turn in sight. Through Feb. 21, 40 companies had withdrawn IPO documents, while just 14 have filed paperwork to go public. "Only the most solid companies are able to get out," says Jeffrey R. Hirschkorn, an analyst with IPO Monitor.

And those that did settled for thrift-store prices. KPMG Consulting cut its valuation by $1.8 billion, or 39%, for its February IPO, despite boasting $2 billion in annual revenues and $218 million in profits.

WORSE OPTION. So why even go public in this atmosphere? Clearly for some companies, the need for money outweighs the risk of jumping into a roiling market. In Loudcloud's case, it had already burned through $112 million, including stock compensation, in 13 months, leaving it with just $112 million in cash as of Oct. 31. Given its burn rate, that's likely to be 30% lower today. Yet turning to venture-capital firms is a worse option: They are offering even stingier valuations.

Back in September, 1998, online auctioneer eBay Inc. was able to reinvigorate a sleepy IPO market with its rocketing offering. But the Web powerhouse benefited from a strong business model and a better economy. And scores of other tech IPOs were waiting in the wings. Today, Verizon Wireless Inc. is the only big-name tech offering in the queue. So, even if a celebrity founder is enough to squeak Loudcloud out of the starting gates, Andreessen is unlikely to defy Wall Street gravity again.

By Ben Elgin

Elgin tracks IPOs in San Mateo, Calif.

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