Tech IPOs Run Out of Tricks

Now that Wall Street's scandals have made tactics for inflating their prices taboo, deals are way down -- and smaller, too

Technology stocks are up 40% since January. Corporate spending on computer equipment is on the mend. And on Sept. 23, Pocatello (Idaho)-based semiconductor chipmaker Amis Holdings (AMIS ) raised $600 million in the biggest tech initial public offering since hard-drive maker Seagate Technology (STX ) was listed almost a year ago.

If there are any investors who still think the days of eye-popping tech IPOs will return some day, they're likely to be disappointed. As the trial of ex-Credit Suisse First Boston star tech banker Frank Quattrone begins -- he goes to court on Sept. 29, on obstruction-of-justice charges he denies -- industry observers from Wall Street to Silicon Valley say tech banking's Wild West days are gone. From now on, the first-day returns on most tech offerings are expected to stay closer to earth, 35% on average -- a far cry from the heady days of 1999, when IPOs shot up as high as 700%. Indeed, Amis's offering rose a modest 0.5% in its first day of trading.


  It seems that tech banking is growing up. Just as the junk-bond business settled down after the collapse of Michael R. Milken's Drexel Burnham Lambert in 1990, tech banking is evolving into a more normalized operation at many investment banks. One big reason is that most of the tricks that Wall Street used to pump up IPO prices are now forbidden. Bankers can no longer help analysts get fat bonuses in return for positive reports. They cannot promise their IPO companies stellar research ratings or even coverage. And since Wall Street has drastically downsized its tech-banking teams -- by 70% -- bankers are pickier about which potential IPO candidates they will spend their time wooing.

Many IPOs are not getting to market at all. Only 10 U.S. tech and Internet-related startups have gone public so far this year, down from 365 in 1999. In the '90s, the average was 155 a year, according to research firm Dealogic, and anything like that is out of reach for the foreseeable future. "I cannot see Morgan Stanley handling more than 10 tech IPOs a year," says Dhiren Shah, head of global tech banking at Morgan Stanley. The firm handled 32 tech IPOs in 1999.


  Most of the deals getting done are much smaller these days. "The typical $1 billion market-cap tech underwriting done in 1999 is now a $100 to $200 million market-cap company," says William R. Hambrecht, who runs WR Hambrecht & Co., an online IPO auction firm.

While tech banking is becoming mundane, almost dull, for investment banks, investing in tech IPOs is riskier than ever for money managers. Since bankers can't guarantee a humongous first-day jump, professional investors are exercising more caution. These days, bankers say, investors are most interested in companies that have revenues of at least $10 million a quarter -- and profits. "There actually is a strong demand for high-quality, seasoned, attractively valued tech companies," says Brad Koenig, co-head of tech, media, and telecom at Goldman, Sachs & Co. "But there are very few in the pipeline that meet the thresholds required by today's markets."

Certainly, there are signs that investors may lower their standards once again as the stock market strengthens. Amis, for example, is no paragon of consistent profitability. Although it posted profits for three years, the company reported a $6.7 million operating loss in the quarter ended June 28. And online gift shop RedEnvelope (REDE ), which listed on Sept. 24, posted a $1 million loss during that period.

Still, that's a lot different from the '90s' investor frenzy over shares issued by startups with little more than a business plan. The rules have changed. No longer will the shares of tech IPOs soar to the heavens. And that's healthy.

By Emily Thornton in New York, with Faith Arner in Boston

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