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.


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.


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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