there's cash in those shoeboxes.

Rocket's Fizzled IPO May Pop Europe's Tech Bubble

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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A reckoning may be imminent for hot Internet stocks. Germany hosted two major technology initial public offerings this week, from online retailer Zalando and start-up incubator Rocket Internet: Both are now trading below their initial prices.

The two giants of the hot Berlin tech scene don't operate in either the U.S. or China, so you can be forgiven for not knowing them. The goal of the Samwer brothers, who founded Rocket and helped set up Zalando, is to become the biggest e-commerce players outside of those two countries. Zalando is already the biggest Internet fashion retailer in Europe, operating in 15 countries. Rocket's portfolio companies sell clothes, food and furnishings in Southeast Asia, Russia, Latin America, even Africa -- places the mostly U.S. firms they imitate, such as Zappos, the initial model for Zalando, aren't interested in covering.

Both Zalando and Rocket timed their IPOs to ride the coattails of Chinese e-commerce giant Alibaba's mind-boggling $25 billion offering. During Rocket's road show, its chief executive Oliver Samwer used Alibaba's example to explain why his emerging-markets projects were worth investing in: "The fewer stores a country has, the faster e-commerce grows. Whoever doesn't believe that can look at the Alibaba prospectus."

Like most visionary executives, Samwer has a personal reality distortion field, but it wasn't really necessary to sell this simple and convincing story, in part because investors still tend to lump all emerging markets together. Making a bet on the development of a strong middle class in the Philippines or Kenya doesn't seem less wise than investing in a middle-class consumerist future for China.

Zalando's pitch, based on European consumers' well-known price sensitivity, was just as easy to make. Besides, strong European tech companies are a rarity, and the two newcomers look great for rounding off diversified portfolios.

Both Zalando and Rocket managed to price their IPOs at the top of their expected price ranges. Both flotations were 10 times oversubscribed.

Then they came to market and fizzled. Zalando popped 14 percent from the 21.5 euro ($27.1) opening price at the start of trading Wednesday -- in line with the average for first-day jumps this year, -- then came back down. At the time of this writing, it trades at about 19.9 euros. Rocket didn't even manage an initial pop. It dropped steeply as trading started today, then crawled back closer to the 42.5 euro IPO price. It's currently down more than 5 percent.

Failure is, of course, relative. The Swedish investment company Kinnevik, which invested a total of $1.6 billion in Zalando, Rocket and Rocket's portfolio companies, today owns Zalando and Rocket stakes worth more than $3.1 billion, along with hundreds of millions of euros in cash it made by selling some of its shares during the IPOs. The Samwer brothers are now official billionaires, with plenty of money to expand their business and increase equity stakes in some projects they had been forced to cede to early investors, including Kinnevik.

To be fair, Facebook behaved more or less like Zalando on its first day of trading in 2012, jumping 18 percent at one point then sinking back to the offering price. Facebook, though, has since rallied.

It's meaningful that Rocket's and Zalando's debuts took place in Frankfurt, not New York or London. German investors are cautious and not particularly hungry for Silicon Valley-type hype. Rocket is, to them, just another money-losing company -- none of its biggest projects is profitable because they're all relatively recent start-ups -- and Zalando has only just shown its first quarterly profit.

Still, the poor start of the two Berlin companies' market histories is more than a local phenomenon or a freak accident. Much-hyped Alibaba is almost 14 percent down from its Sept. 19 peak, though it is still up 27 percent from its offering price. Weibo, China's Twitter, is down 31 percent from its September 12 peak, and is less than 6 percent higher than its offering price.

The same story that sold these companies to the initial buyers -- tech outside the U.S. -- may now be undermining the shares. At some point, investors may decide that stretched tech valuations are incompatible with emerging market risks or corporate governance issues: Investors don't really own stakes in Alibaba, and Rocket doesn't control its most mature companies.

If the current tech bubble bursts -- and the valuations are nothing if not bubbly -- the sell-off will start with companies whose obvious risks were overlooked because of the hype. For now, though, the Samwer brothers and Kinnevik ought to be congratulated: They just managed to jump onto a departing train.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net