Tech IPOs: The Tide May Be Turning

There's new interest in Europe, but the lessons of the crash haven't been forgotten

Newspapers raved for days beforehand about the hot new tech stock offering. On its first trading day, millions of shares changed hands, and the price soared more than 30%. Tech types called their buddies to ask if they had heard the news. And by nightfall, the company's entrepreneur-founder was a billionaire.

Sounds like a dot-com dream circa 1999, but it all happened on Jan. 30 in Paris. That's when Iliad, the parent company of France's No. 2 Internet service provider, Free, became the first technology company to go public on the Euronext bourse in more than two years. Although the initial public offering was hardly the size of Yahoo! Inc. (YHOO ) or Netscape Communications Corp., Iliad raised $118 million to fund expansion of its network and ended the day with a market capitalization of $1.4 billion. It was a blast of sunlight in the long, dark winter for European technology deals. "There's no question the markets are warming up," says Philippe Herbert, managing director of Partech International, a venture-capital firm with offices in Paris and San Francisco that hopes to float several companies this year after being shut out of the initial-public-offering market since 2000.

The window first opened a crack last fall. On Oct. 16, Edinburgh-based Wolfson Microelectronics PLC, which designs chips for mobile phones and consumer electronics, became the first new tech company to list on the London Stock Exchange in 18 months, raising $115 million. The company's stock has since soared 41%. A few weeks later, U.S. software maker Novell Inc. (NOVL ) bought Germany's Suse Linux for $210 million -- the highest price paid for a tech acquisition in Europe in more than two years. A handful of smaller acquisitions and IPOs have since followed. "There's a tremendous backlog of companies that want to go out," says Javier Echarri, secretary general of the European Private Equity & Venture Capital Assn. in Brussels. Analysts figure there could be 50 or more technology IPOs and acquisitions sized over $100 million in Europe this year.

Why are buyers suddenly developing an appetite for tech outfits? The strong performance of global stock markets in 2003 and the shift out of bonds left big investors sitting on piles of cash -- and looking for equity plays. European markets are buzzing over an upsurge in mergers and acquisitions, such as Sanofi-Synthélabo's (SYN ) $61 billion hostile bid for larger French drug rival Aventis (AVE ). In the U.S., huge IPOs expected later this year from Google Inc. and Inc. could spur other stock issues worldwide. And signs of a rise in corporate technology spending are also helping reignite interest in the tech sector. "There's a lot of pent-up demand from investors," says Tom Troubridge, head of the London Capital Markets Group at PricewaterhouseCoopers.

THE PIPELINE IS FILLING. Don't expect another stock bubble, though. Entrepreneurs, bankers, and institutional buyers burned by the tech implosion are being ultra-selective about which companies to deal with. Iliad, for instance, was founded eight years ago and has been profitable since 2001. It expects revenues of $363 million this year. Wolfson, though smaller, has been in business since 1985 and even paid a dividend from its $2.4 million in 2002 profits. "People have internalized the lessons from the boom and crash," says Julie Meyer, principal at London-based Ariadne Capital. "It's just not possible now to bring out crappy companies."

Instead, the pipeline is filling with solid contenders likely to attract buyers. One that has already filed to go public is Cambridge Silicon Radio of Cambridge, England, the leading provider of chips for short-range radio linkups between devices such as mobile phones and cordless earpieces. Founded in 1998, the company had revenues of $67.6 million in 2003 and made a profit in the past two quarters. It aims to raise $110 million before the end of April, which would value the company at $460 million. In one of the biggest deals expected this year, U.S.-based SBC Communications Inc. (SBC ). and other foreign investors plan to float their minority stake in Belgacom, Belgium's top phone company, which offers fixed and mobile-phone service. The offering is expected to be worth $4.38 billion.

As the market picks up, other European companies will likely pile in. One candidate is Paris-based Kelkoo, an online directory of shopping Web sites. The five-year-old company reported 2003 revenues of $53 million, up threefold from the previous year, and has been profitable since September, 2002. "We're one of the few Internet companies in Europe that can plan to go public this year," says CEO Pierre Chappaz. Other possibilities: London-based Sporting Exchange Ltd., operator of the popular Betfair online betting service; and Richard Branson's fast-growing wireless operator, Virgin Mobile Telecom.

Some long-rumored IPO candidates are holding back, however. British mobile-phone software provider Symbian Ltd. isn't expected to go public before it makes a profit, perhaps in 2005. "Sometimes it makes more sense to wait," says Michele Appendino of Milan venture-capital firm Net Partners, who has three companies in his portfolio that might list this year. As Iliad and Wolfson Microelectronics have already shown, in Europe's nascent IPO recovery, a solid bottom line -- and plenty of patience -- are prerequisites for striking gold.

By Andy Reinhardt in Paris

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