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In Initial Offerings, Internet Stocks Soar, Others Struggle

Investing: Enthusiasm for Net-related firms is creating an IPO market that is becoming increasingly two-tiered.

February 12, 1999|DEBORA VRANA | TIMES STAFF WRITER

The robust appetite for new Internet stocks continued Thursday, but non-Net initial public offerings struggled in the increasingly stratified IPO market.

Shares of profitable Los Angeles-based Korn/Ferry International, the world's largest executive search firm, fell during their first trading day even as stocks of several unprofitable Internet firms soared in their debuts.

$ The IPO market, in which growing companies sell stock to the public for the first time, is becoming two-tiered, as companies with any connection to the Internet fare well but others can face difficulty, analysts said.

"Investors aren't looking that carefully at the stocks they are buying--they are whipped up in this Internet frenzy, for better or worse. They just want a '.com' issue, and there are good ones and there are bad ones," said Gail Bronson, analyst with IPO Monitor, a data firm in Calabasas. "The only guarantee a '.com' provides is exceptional volatility."

Some analysts said that if the trend continues, several non-Internet companies planning IPOs might hold off on concerns that their shares could flounder.

In Korn/Ferry's disappointing debut, the share price quickly slid early on and eventually closed at $13, down $1 from its $14 IPO price in New York Stock Exchange trading. At one point during the session the stock had sunk as low as $12.75.

Another non-Internet firm, Gabelli Asset Management Inc., the money management company run by well-known stock picker Mario Gabelli, was barely changed in its first day. The Rye, N.Y.-based company's stock rose 31 cents from its offering price to close at $17.81 on the Big Board.

But among Internet IPOs, the story was different.

Santa Clara, Calif.-based Healtheon Corp., which processes health-care transactions through the Internet but has yet to post a profit, nearly quadrupled in its first day of trading, after an IPO sale at $8 a share. Healtheon, formed by Netscape Communications Corp. founder James Clark, soared to close at $31.38 on Nasdaq, for a one-day gain of 292%--making it among the biggest IPO winners ever.

By contrast, Net search engine Yahoo rose 154% on its first trading day in 1996.

Investors like Healtheon's business plan--using the Internet to simplify paperwork, cut costs and improve care at health-care companies--even though analysts don't expect the company to see a profit any time soon.

Other highflying IPOs included VerticalNet Inc., a Horsham, Pa.-based firm that specializes in online commerce for business; and Prodigy Communications Corp., a White Plains, N.Y.-based Internet service provider. Both stocks soared in their debuts on the Nasdaq market. Shares of Catapult Communications Corp., a Mountain View, Calif.-based provider of testing systems for digital telecommunications networks, also rose in its IPO, on Nasdaq.

"Investors on Thursday were not seeing an unlimited upside to Korn/Ferry as they were for some of the Internet IPOs," said Matthew Litfin, an analyst with William Blair & Co., a Chicago investment firm. "It wasn't a stellar first day [for Korn/Ferry], but you can't watch it for one day and make a decision."

The Korn/Ferry deal, priced by underwriter Credit Suisse First Boston Corp., had difficulty because of several factors, including the firm's history of nearly 30 years as a private company and a management change just weeks before the IPO--the type of move that can make investors nervous.

"This shake-up in December left a lot of ripples in the water," said David Menlow of IPO Financial Network in New Jersey.

Also, investors may have been concerned by Korn/Ferry's recent announcement that it expects revenue for its fiscal third quarter, which ended Jan. 31, to be significantly lower than the $91 million reported for the previous quarter.

In a recent filing with the Securities and Exchange Commission, Korn/Ferry blamed the quarterly decline on a drop in business from financial services companies, which have postponed hiring because of market turmoil last year.

Korn/Ferry's profit fell to $5.2 million in 1998 from $9 million the year before.

Still, Korn/Ferry makes money--unlike most Internet companies--and has been a leader in its industry for decades. That has some analysts predicting the company's stock will show strength in the next few weeks.

"We think this is short-term, and when things settle down, the stock will begin moving," Menlow said.

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Tale of Two Markets

Internet companies led the way as several stocks made their trading debuts Thursday. Though Net-related companies soared, their offline counterparts performed more modestly. Price and percentage changes of the day's offerings:

*--*

Company Ticker Close change % change VerticalNet VERT $45.38 +29.38 +183.6% Healtheon HLTH $31.38, +23.38 +129.9 Prodigy Comm. PRGY $28.13 +13.13 +87.5 Catapult Comm. CATT $13.00 +3.00 +30.0 Gabelli Asset Mgmt. GBL $17.81 +31 cents +1.8 Korn/Ferry Int'l KFY $13.00 --1.00 --7.1

*--*

Source: Bloomberg News

* STOCKS SOAR: Dow leaps 186.15 points to 9,363.46 in broad rebound. C4

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