2004 IPO Outlook Dubious

After three years of fear and loathing, are investors ready to embrace the initial public offerings of seductive startups again? As they do with so many other things in modern life, lots of people are counting on Google to supply the answer.

The maker of the world's most popular Internet search engine is widely expected to make its stock market debut during the first half of 2004, creating a level of excitement rarely seen since the dot-com gold rush turned Silicon Valley into the mother lode of IPO ecstasy and agony.

If the IPO market recaptures some of its lost luster in the coming year, the nation's recovering economy might just bask in the afterglow.

That's because a vibrant IPO market would spawn more companies able to use their publicly traded stocks as a currency to buy other businesses and attract more talented employees.

A more receptive audience for IPOs emboldens venture capitalists to invest more in startups -- a phenomenon that in turn encourages entrepreneurs to put more energy into developing innovative ideas.

But the IPO market has been in a rut since the dot-com bubble burst and a series of influence-peddling scandals fed a perception that the system had been rigged to produce big gains for a privileged few, leaving other investors to wallow in the slop left behind.

From January 2001 through Dec. 9 of this year, there were 238 IPOs, according to IPOfinancial.com, which tracks the market. It's a sobering contrast to the froth of the bubble years -- from 1998 through 2000 there were a total 1,250 IPOs, according to IPOfinancial.com.

An eye-popping deal like Google's could be enough to help snap the IPO lull, said Michael Moe, chief executive of ThinkEquity, a high-tech investment bank in San Francisco.

``A lot of investors put their hands on a hot oven and got burned so they are being very careful about going close to the oven again,'' Moe said. ``Google's IPO could be the catalyst that helps bring people back.''

Other market observers are less sanguine, characterizing Google as a rare jewel amid the high-tech rubble.

High-tech companies simply don't hold the same allure as they did before the excruciating pain the dot-com crash caused investors, said David Menlow, IPOfinancial's president.

Companies in staid industries such as freighting, steel and finance might even be more appealing to cautious investors than unproven tech companies with greater growth potential.

``Investors are still twitchy,'' Menlow said. ``They want to see a certain crispness from companies selling IPOs. They are no longer interested in companies with some esoteric business model.''

For its part, Mountain View-based Google isn't discussing its IPO plans, citing federal securities laws.

Google's silence hasn't stopped other tongues from wagging, however, about an IPO likely to value the 5-year-old company in the $20 billion range and transform many of its 1,300 employees into millionaires. Google's co-founders, Larry Page and Sergey Brin, probably will be minted as billionaires before they turn 31 next year.

``There is a lot of wishful thinking going on about Google's IPO, but I don't understand why,'' said Jonathan Silver, managing director of Core Capital Partners, a Washington D.C. venture capital firm.

``Even if Google's IPO really pops and the company winds up being worth $100 billion, so what? It's not like there are a lot of other promising companies ready to go (IPO) after that train has left the station.''

In fact, hundreds of other once-promising startups have disintegrated while Google has thrived. Although the company hasn't yet disclosed its financial statements, Google is already profitable, with revenue this year believed to range between $700 million and $1 billion.

Finances aren't the only factors working in Google's favor -- with millions of loyal users, the search engine already has built a brand that's the envy of long-established businesses.

It's a pedigree few, if any other startups can bring to an IPO.

Among the other Silicon Valley companies likely to pursue IPOs in 2004, online software distributor Salesforce.com is the only one stirring much enthusiasm.

Other intriguing IPO prospects include Shopping.com, a Brisbane online service that has become a popular destination among bargain-savvy consumers, and VMware, a Palo Alto software maker whose products help make corporate computers run more efficiently.

All of those candidates, though, are small fry compared to Google. Among the other up-and-comers, Salesforce.com appears to have achieved the greatest financial success. The San Francisco-based company has been profitable for the past three quarters and will generate nearly $100 million in revenue this year, according to knowledgeable sources.

Another San Francisco company with a well-known brand, audio recording pioneer maker Dolby Laboratories Inc., also is exploring the possibility of a 2004 IPO, ending decades of private ownership.

There isn't much anticipation building for IPOs outside Silicon Valley, Menlow said.

Just about any company hoping to go public in 2004 needs to have a profitable track record, said Reed Taussig, CEO of Callidus Software, which raised $70 million in an IPO completed in late November.

``Investors aren't interested in unproven business models,'' said Taussig, who attended 70 different meetings with investors to help sell the merits of Callidus' IPO. ``I just don't think there is a huge supply of tech IPOs waiting to happen out there because very few profitable, meat-and-potatoes companies have been built in the last few years.''

Callidus, a San Jose maker of employee compensation software, became profitable shortly before its IPO, earning $540,000 during the six months that ended in September. The 7-year-old company's IPO price was set at $14 per share and then the stock rose 24 percent, or $3.37, on its first day of trading on the Nasdaq Stock Market. It was down to $15 on Dec. 11.

Google's IPO seems likely to produce a far bigger bang, although it faces several formidable threats that could spook investors. The company's success has thrust it into the cross hairs of Microsoft Corp. and Yahoo! Inc., a pair of heavyweights determined to supplant Google as king of online search.

If Microsoft and Yahoo make inroads at Google's expense, all that pent-up investor enthusiasm for the hottest IPO in years could abruptly turn into another cold shoulder.