Commentary: In Tech, One Cork Popping Does Not a Party Make

By Linda Himelstein

Silicon Valley is buzzing about Seagate Technology Holdings Inc. On Oct. 11, the computer disk-drive maker stepped forward with plans to raise up to $1 billion in an initial public offering. Given the dearth of tech IPOs--there hasn't been one since June--many Valleyites are downright giddy over the possibility that Seagate might bring the dormant market back to life.

Such hopes seem far-fetched. While Wall Street may give Seagate a warm welcome, there is little enthusiasm for tech IPOs in general. "We're taking little bites here and there," says Michael Sutton, chief investment officer at Pilgrim Baxter & Associates Ltd., an institutional investment firm. "To say we're ready to gorge ourselves wouldn't be accurate."

Why? The combination of weak prospects for the tech industry, the stock market doldrums, and the dearth of tech underwriters means that even promising companies are having a hard time going public. The numbers tell the story: So far this year, just 10 tech firms have gone public--compared with 250 in 1999.

Fact is, Seagate is a Techland anomaly: It's doing far better than most of the beaten-down sector. The Scotts Valley (Calif.) giant, which went private in 2000 to restructure its operations, posted more than $6 billion in revenue for its fiscal year ending in June, a 2% gain. At the same time, it improved its gross profit margin from 16.9% to 26.2%. In Seagate's most recent quarter, which ended in September, net income jumped from $34 million a year ago to $110 million. Moreover, analysts expect demand for Seagate's data-storage markets to increase exponentially as consumers flock to handhelds, wireless devices, and other cutting-edge technologies.

Still, why would Seagate consider going public with tech valuations so low? Chief Executive Stephen J. Luczo isn't talking, but industry experts say the reasoning goes something like this: Given the disk-drive industry's ongoing consolidation, it makes sense to raise capital now so Seagate can outflank rivals. With $801 million in cash currently, the company could use a heftier war chest. It plans to invest in new-generation products and to acquire new technologies--especially in the burgeoning markets for handhelds, digital entertainment, and automobile computers.

Naturally, Seagate's investor group, which includes Silver Lake Partners and Texas Pacific Group, is also itching for payday. Having laid out $1.8 billion to buy the disk-drive business two years ago, they'll pocket a hefty return. And some of the cash raised would go to a deferred compensation bill of up to $147 million.

So will a successful Seagate offering help jump-start the IPO market? There's evidence that Wall Street is not totally allergic to tech: Anteon, a technology and systems-engineering and integration company, IPO'd in March at $18 a share. It now trades for around $28. Other recent IPO winners: the enterprise-software company Altiris and network-security provider Veridian, both also trading above their offering prices. "The window is open to good companies," says John Dennis Delafield, president and CEO of Seattle investment banking boutique Delafield Hambrecht Inc.

But that hardly means Silicon Valley should break out the bubbly. For now, profitable, private tech companies remain few and far between. Although a record 5,380 tech startups got venture capital in 2000, few have enough blue-chip customers or revenue traction to meet the Street's higher bar. Aside from a handful of companies, such as search engine Google, the crop of fledglings is pretty green. "The cupboard is bare," says Bradford Koenig, head of tech investment banking at Goldman, Sachs & Co.

Then there's the problem of finding underwriters. Several investment banks whose bread and butter was servicing small to midsize tech outfits have gone the way of dot-coms, while big-time IPO jockeys such as Morgan Stanley (MWD ), Goldman (GS ), and Merrill Lynch (MER ) have shrunken tech practices. "The distribution system is as big a problem as the economy," says venture capitalist C. Richard Kramlich of New Enterprise Associates.

Bottom line: A Seagate deal will provide some much-needed good news in Silicon Valley. But the idea that it will help revive a moribund IPO market is just wishful thinking.

Himelstein writes about technology from San Mateo, Calif.

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