COMMENTARY | COLUMNISTS | GEORGE CHAMBERLIN

Efficient pricing, cautious investors keep IPO market in check

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San Diego companies are joining others from across the country to join the ranks of the publicly traded. After years of decline, filings of initial public offerings of stocks are on the rebound.

So far this year, 62 companies have completed IPOs. That compares to 68 for all of 2003 and a staggering 486 issues in 1999. Another 78 companies filed in the first quarter of 2004 for future stock offerings.

"What a difference a year makes," said Linda Killian, founder of Renaissance Capital, an IPO research company and manager of the IPO Plus Fund. "The IPO market is well on its way to a full-blown recovery."

Besides the volume of IPO activity, what separates this year's activity from the past is the tepid response that most new issues have received. For instance, last week's offering of 5.5 million shares of stock by Digirad (Nasdaq: DRAD), a San Diego medical imaging company, was priced at $12 a share. In the first day of trading the stock price declined modestly to $11.77.

Another new issue last week with local implication also received a mixed result. CB Richard Ellis (NYSE: CBG), the world's largest global, commercial real estate services company with 13,500 employees, hit the street with 24 million shares priced at $19. It closed at $18.35 on Thursday.

Back in 1999, the average first-day return on an IPO was a soaring 65 percent. Today, most new issues trade in a very close proximity to their offering price.

"While individual IPO returns varied considerably, overall results were quite positive," said Killian. "The average deal produced a solid 12 percent gain in the first quarter, representing the fourth consecutive quarter of positive double-digit returns."

This volatility, however, isn't discouraging other companies from going public. The roster of recent filing includes some impressive names.

Domino's Pizza and Mimi's Caf? are two food companies that will go public. Mutual fund advisory service Morningstar and vitamin distributor GNC will join them.

And at least three other San Diego County companies are queuing up for their coming out party. Expected to hit the street within the next couple of weeks is Senomyx, a company that collaborates with Kraft (NYSE: KFT), Nestle, Coca-Cola (NYSE: KO) and others to enhance the taste and smell of their products.

Also set to go are Metabasis Therapeutics, a biotech company developing drugs for the treatment of cancer and diabetes, and WebSideStory, a company that tracks Internet usage.

And then there's Google. The popular Internet search engine has been the subject of much debate and interest. The company is expected to complete its stock offering in the next few months and it is expected to be a flashback to the good old days of IPOs. However, unlike most offerings, this issue will be done through what is called a "Dutch Auction."

"Instead of relying on investment bankers to determine the number of shares to be offered and their price, the company offers its shares directly to the public, and the price is set depending on market demands," said Jeff Ryan, senior research analyst at the Schwab Center for Investment Research.

"By pricing the IPO correctly, Dutch auctions are designed to avoid the type of large first-day returns that are the result of underpricing of typical IPOs," said Ryan.

The maniacal demand for IPO shares back in 1999 was a telltale sign that the rise in stock prices -- especially technology and dot-com stocks like MP3.com, Pets.com and others -- had reached bubble proportions. Can the markets be headed in that direction again?

Most observers believe that more efficient pricing of stock offerings and a more cautious approach by investors is keeping things from getting over heated. And, like just about every other aspect of the financial markets, government regulators are keeping a close eye on the mechanical aspects of new issue underwritings.


Chamberlin's financial analysis column appears each Monday in The Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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