Market Rout Exposes High-Flying Dotcom Deals

9 Aug, 2011

The latest market rout might serve as a warning to investors who have euphorically poured money into high-flying technology stocks.

Pandora Media Inc and Renren Inc are both trading below their IPO price. LinkedIn shares fell as much as 10 percent after Evercore Partners and Morgan Stanley downgraded their ratings and Yandex NV, while up from its IPO price, has been a roller coaster.

As broad economic worries pound the markets, a growing number of IPOs are being delayed or pulled. Tech IPOs, whose multibillion valuations recall the heady days of the dotcom boom of the late 90s and early 2000s, might fall the furthest.

"Tech IPOs are some of the most speculative names out there," said hedge fund manager and technology investor Eric Jackson.

When better-than-expected July U.S. job growth figures came out on Friday, Jackson's first reaction was to tweet about what it meant for tech IPOs.

"How much did Groupon and Zynga like that jobs report?" he tweeted.

Investors love tech IPOs because they typically offer bigger returns than other stocks, particularly when interest rates are low. But investors have bid up new tech stocks so much that some have called a second tech bubble. The question now is how that bubble will be pierced.

LinkedIn Corp shares plummeted as much as 10 percent on Friday after Evercore Partners and Morgan Stanley analysts cut their ratings. Evercore, which has a $70 price target on the stock, downgraded it to "underweight" and called the company "the most expensive name in our coverage universe."

Analysts at Morgan Stanley, which was one of the lead underwriters on LinkedIn's IPO, downgraded the stock to "equal-weight."

LinkedIn shares closed down 4.3 percent at $91.36 on Friday.

Renren, sometimes called the "Facebook of China" is another struggling recent tech IPO. Its shares have lost nearly half their value since the company's share sale in May.

Online radio company Pandora is 15.5 percent off its IPO price.


U.S. markets closed out their worst week in more than two years on Friday amid frustration with sluggish economic growth and the inability of politicians to address pressing concerns over high public debt in Europe and the United States.

Even with the broader slowdown, however, the tech market seemed especially sensitive.

The shares of GSV Capital Corp, a publicly traded investment fund that owns stakes in venture capital-backed tech companies Facebook, Gilt Groupe and Chegg, have slumped almost 30 percent since hitting a record on July 18. The Nasdaq Composite index is down almost 8 percent in that period.

On the IPO front, Portuguese mobile marketing and payment services provider TIM w.e., which is on the road meeting potential investors right now, is closely watching the market, another person familiar with the situation said.

When Chinese online video company Tudou launched its roadshow earlier this week, it did so at a valuation far below what investors were expecting, that person said, but declined to say what was expected.

"Less mature, less profitable companies could have a tougher time going public," said Nick Einhorn, an analyst at Connecticut-based IPO research house Renaissance Capital.

The coming week, which has about a dozen IPOs scheduled to price, will be a good test of the severity of the selloff, Einhorn added.

(Reporting by Clare Baldwin in New York; additional reporting by Alistair Barr in San Francisco; editing by Andre Grenon)