Amazon.com. EarthWeb. Inktomi. Initial public offerings for Internet start-ups have helped ignite the stock market over the last 18 months, a time during which the Dow Jones industrial average propelled into and well above the unbelievable 11,000 level. Some Net stocks shot up astronomically and stayed there. Many fizzled.
Amazon.com. EarthWeb. Inktomi. Initial public offerings for
Internet start-ups have helped ignite the stock market over the last 18
months, a time during which the Dow Jones industrial average propelled
into and well above the unbelievable 11,000 level. Some Net stocks shot
up astronomically and stayed there. Many fizzled.
As with most things, there are varying opinions about whether these
start-up stocks deserve the valuations they have. If they don’t, what
role have PR pros played in inflating them? According to some experts,
there is always a suspicion that the PR people have overhyped. But when
talking to these experts, it’s clear that the market itself is fueling
much of the hysteria.
’The most memorable Internet IPOs were the ones that doubled in price
the first day,’ notes Jay Ritter, a finance professor at the University
of Florida in Gainesville. ’Some, like theglobe.com, which opened in
November 1998 at dollars 9 and closed that day at dollars 63, turned
everyone’s head and caused so many investors to scramble for similar
stocks.’
According to Ritter, from the beginning of this year to mid-September,
60 IPOs doubled in price on opening day. That compares with only 39 in
all of the previous 25 years.
Although there’s been a big falloff in Net stocks since last spring,
scattered new issues still manage to wow. E-Loan’s stock opened at
dollars 21 - 50% higher than its offering price - and closed at dollars
37 on June 29. Red Hat’s new issue tripled on August 11.
Agile Software’s stock doubled on August 20. Clearly, Net IPOs still
have a lot of zip.
Some of the valuations ’clearly show that the Internet has reflected a
massive overhyping,’ says Ritter. ’But if you didn’t have willing
listeners it wouldn’t have worked.’
Is PR culpable of that ’overhype’? In an industry renowned for hype,
it’s ironic that most people interviewed let the PR industry off the
hook.
’I don’t think that the PR people have exacerbated an already difficult
situation,’ offers Gretchen Morgenson, assistant business-financial
editor at The New York Times. ’More hype is coming from
nontraditional-PR types, such as analysts and investment bankers.’
David Kalish, technology writer for the Associated Press, adds,
’Analysts do more of the hyping. It’s hard nowadays to find a bearish
analyst.’
Quiet period
The communications potential for new stock issues is limited by the
Securities and Exchange Commission’s requirement that issuers observe a
’quiet period’ of no PR pitching so as not to overinfluence possible
investors. Several PR pros call this process frustrating since it ties
their hands - well, their mouths - and limits the public’s exposure to
the company issuing the stocks. That’s not what PR pros try to
achieve.
Making the situation more chaotic, says Richard Stern, chairman of New
York PR agency Stern & Company, is the current fuzziness over the quiet
period’s timetable. ’It’s supposed to be 30 days after the IPO proxy
statement is issued,’ he says. ’But there’s growing contention among
attorneys and vagueness from the SEC about the 30 days before the IPO
(itself) is issued.
Is that also part of the quiet period? It’s not supposed to be but
companies have to be careful how much and what they say about the
forthcoming IPO in that prior period.’
Violating the SEC rules can be painful. One Net company preparing an IPO
had its hands slapped for stock touting when one senior manager bragged
in a sales pitch that the imminent issue would be ’the new Amazon.com.’
The agency enforced a postponement of the IPO.
A longtime PR pro who requested anonymity conceded, ’The whole
environment of the PR push on IPOs is a bit on the dangerous side. If my
job is to present information to investors, it’s a serious
responsibility and I have to tread carefully. If I create fantastic
possibilities, if I can talk people into investing in a stock that
doesn’t merit it, I would be stepping over the line. I do think there’s
been a lot of excessive hype but it’s not coming from the PR
practitioners. I suspect it’s coming more from the financial
people.’
Indeed, PR pros deny any guilt for the stocks’ roller-coaster, viewing
what they do as educational. Don Middleberg, president of Middleberg &
Associates in New York, points to the investment bankers as the chief
hypsters: ’As an agency much involved with IPOs, we are out to give the
client the highest possible visibility for the entire business, not just
the IPO.
The issue’s key beneficiaries are the institutions - the pension funds,
the mutual funds, the insurance companies - who get an allotment from
the investment bankers at a beneficial price. That’s where the hype
comes in - from the bankers.’
Yet, some PR pros pin the blame for the IPO hype on their cousins in the
investor relations community. ’The IR business has expanded greatly,
literally doubling in the last two years in company expenditures, the
number of people involved and the agencies getting into it,’ says Ted
Pincus, chairman of the Financial Relations Board in Chicago. ’In so
doing, the IR business has attracted a number of people eager to make a
big killing who went out and peddled stocks irrespective of their real
values. That’s where the real puffery occurred.’
Pincus, of course, says his agency doesn’t engage in puffery but
performs an information service on IPOs before they’re issued and
afterward.
Supply exceeds demand
Experts blame others besides analysts and investment bankers. Alan
Ampolsk, senior vice president at Fleishman-Hillard, blames an
oversupply of IPOs and, more interestingly, the use of the IPO to ’gain
attention, not just capital formation’ - in other words, as a PR
tool.
Holland Carney, executive vice president and general manager of
Alexander Ogilvy in San Francisco, regards the IPO as ’the ultimate
branding event.’ A big IPO can draw a lot of attention to a young
Internet company. When Priceline.com opened last March with an offering
price of dollars 16 that turned into dollars 81 that day, it ’led a lot
of consumers to flock to the Priceline site and do business with the
company,’ Carney says. ’Before the IPO, Priceline had 6,000 customers a
week. After the IPO, the company drew 7,000 customers a day.’
But what happens if the stock tanks? ’It can hurt the company’s image as
a brand if the IPO doesn’t do well,’ Carney admits. ’If the price falls
below the offering price, it’s negative publicity for the company that
will persist for a while.’
Indeed, in what might be called the Black Wednesday of the sector, on
May 26 two out of five Net issues from that day - Juno Online Services
and Ziplink - finished at less than a third of their initial offering
prices, and Edgar Online gained only a few cents. It didn’t look good
for those companies.
The investor’s view of the potential of Internet IPOs is still one of
excitement, even if now a bit muted. Clearly, that invites hype - from
whatever the source. And when hype walks in the front door, elation or
disappointment is sure to follow.
As University of Florida’s Ritter puts it, ’Stock investors tend to
confuse growth with profits and good companies with good stocks. That
makes them willing listeners to the hype and overhype. None of them
should consider any IPO stock risk-free.’
HIGHS AND LOWS: TALES OF THREE INTERNET IPOS
AMAZON.COM. One of the Internet’s greatest success stories, this
discounter of books and music (and lately almost everything else) hit a
record high of dollars 221 in April. Since then, it has slumped to a
recent dollars 65-9/16. Here again, PR/IR have been very effective. But
the entry of BarnesandNoble.com and Borders into e-commerce - and
perhaps Amazon’s ambitious diversification moves - have undercut the
value of the stock.
PRICELINE.COM. Is this William Shatner’s company? Nope, it just seems
that way because the movie actor and Star Trek ship commander
personifies the company as its spokesman. Priceline is the brainchild of
canny inventor Jay Walker, who says his stock jumped 331% on the
offering day. But like almost all Internet stocks, Priceline this year
has plummeted from a high of dollars 165 to only dollars 60. Reasons:
new Internet pricing competition and some second thoughts on the part of
investors about the whole ’reverse auction’ concept.
YAHOO.COM. This Internet portal stock went public in April 1996 with an
offering price of dollars 13 but closed the first day at dollars 33.
Despite the dramatic rivalry from America Online, Yahoo created lots of
excitement mainly because of skillful PR and IR, as well as excellent
management presentation and performance. This year, the stock slumped
from a high of dollars 244 to a very recent dollars 162-3/8, due,
observers say, to overexposure and a new conservative stance by
investors.
