The IPO Internet Bubble

Internet IPOs had commenced in earnest in 1995, with three of the browser companies (PSI Net, Spyglass, and Netscape) that provided the technology that made the Internet a tool that anyone with a modicum of personal computer know-how could traverse. Netscape, the best-known of the three, went public on August 14, 1995, selling 5 million shares at $28 a shares, and closed trading on the opening day at $58.25 a share, giving the company a theoretical market cap (outstanding shares x price per share) of $1.06 billion.[1] The Netscape IPO was followed by a number of not insignificant Internet related IPOs in 1996 and 1997, but there has been no “hot new issue” market as overheated as the Internet driven IPOs of circa November 1998–April 2000. In 1999, there were 544 IPOs, in 2000 there were 448, and in 2001 there were 97.[2] In 1999, a record $69 billion was raised in IPOs, nearly double the 1998 total of $36.5 billion and 139 percent of the previous record $49.9 billion in 1996.[3] There were some IPOs by large well-established companies during 1999 (UPS-$4.37 billion; Goldman Sachs-$2.92 billion). The feeding frenzy, however, was fed by start-up Internet related technology and e-business companies with limited operating histories raising amounts of capital disproportionate to any reasonable business plan. Individual investors played an unprecedented role collectively making it possible for the fortunate recipient of an allocation to immediately spin his/her shares after the opening of trading at a handsome profit. The record-setting opening for 1999 was VA Linux Systems, which reached 698 percent of the offering price on the first day of trading. Not all did as handsomely, but of the 25 top IPO opening day trading high, all but one went public in 1999.[4] As the year 2000 opened, 249 companies had already filed to go public, over half of which were technology related.[5] The valuations that pumped-up offering prices followed by unprecedented opening trading prices was based more on investors’ expectations of what they could sell the stock for if they received an allocation than a disciplined evaluation of the company’s business plans and prospects. This is not to say that the Internet did not and will not have a dramatic effect on how commerce is transacted and technological advances to support its infrastructure. But expectations exceeded reality as is evidenced by some of the valuations offering prices and prices at the open of the trading market and close that day put on what in many instances were companies with limited operating history and revenues, if any. Priceline.com, for example, filed a registration statement with an offering price range of $7-9, placing a valuation of $1.15 billion on the company; the offering was priced and completed on March 30, 1999 at $16 or a market capitalization of $2.3 billion, and opened for trading that day at $81 a share and closed at $69, or a market cap of $9.9 billion.[6] On May 5, 1999 its stock reached a high of $151 and on August 6, 2002 was trading at $2.03 a share.[7]

The Internet IPO market continued strong during the first quarter of 2000. On March 9, 2000, the Composite Index for Nasdaq stocks (the home of most Internet and many high tech companies) reached 5046, having taken only four months to climb from 3000 to over 5000. Companies were continuing to do IPOs at unrealistic valuations. Palm Computing went public March 2, 2000 at $38, well above its initial price range of $12 to $14 per share. Palm opened when trading commenced at $145 and closed at $95 a share, or a market cap of $54.3 billion.[8] Palm when it went public was a subsidiary of 3Com, which had a market cap of only $28 million that day, notwithstanding it still owned 95 percent of the outstanding stock of Palm after completion of the public offering.[9] There were, however, dark clouds on the horizon; between March 9, 2000 to April 14, 2000 the Nasdaq Composite went from 5046 to 3676. Twenty leading Internet stocks during that period fell by 6.2 percent (AOL, the lowest) to 78.1 percent (Akamai Technologies, the highest). All but one declined by 24 percent, and ten declined by over 50 percent.[10] This does not tell the whole story as several (if not most) had already declined from their high. Priceline.com, for example, declined from a high of $151 a share on May 5, 1999 to $94 a share on March 10, 2000 to $58 a share on April 14, 2000.[11] During the 4th quarter of 2000, there were only 52 IPOs and during the 1st quarter of 2001 only 21.[12] What happened to this, perhaps, unprecedented misallocation of resources is told by an amazing statistic. A penny stock is defined under the securities laws for a number of regulatory purposes as one that trades for less than $5.00 per share, although as long as it remains listed on a national securities exchange or on Nasdaq it is taken out of that category.[13] Of the 464 Internet-related companies that went public between May 2, 1995 and October 6, 2000, as of August 31, 2001 there was no quote available for 122 companies and 210 were penny stocks (i.e., traded below $5.00 a share).[14]