Net stock depression threatens UK flotations

The dark cloud brooding over Internet stock could threaten a wave of planned UK flotations.

On Tuesday, London shares tumbled to a six month low wiping millions off the value of leading stocks. Astrologers have linked the freefall to todays total eclipse, but most analysts attribute it to fears about an interest rate hike on both sides of the Atlantic.

Today, the personal finance services Web site eXchange saw its share price dip 11 pence below the issue price of 200 pence just three days after its issue. While shares in Freeserve, the only U.K. Internet barometer stock, fell almost 9 percent to 178 pence, although they are still above the 150 pence issue price. The largest U.K. Internet stock, was supposed to give an indication of British Net value, and kick off a series of Initial Public Offerings (IPO).

Global weather conditions are bound to affect the U.K. climate, according to Miles Saltiel, technology analyst at WestLB Panmure. "The success of Freeserve set a benchmark value and created an appetite for net stock. Naturally, what's happened is causing people to reconsider."

U.S. bell-weathers, such as AOL and Yahoo! , have bounced back, but if the downwards spiral in the U.S. continues, there are fears an Internet meltdown will hit a string of planned U.K. flotations. "If the markets continues in this direction, it'll give financial directors and merchant banks cause to pause," said Saltiel.

But Saltiel added that Net value is driven by flow of industry news both ways: Amazon's second quarter results drive negative sentiment while Cisco's positive results do the opposite.

Among those reported to be lining up for IPO's are Lastminute.com and QXL, the online auctioneer. QXL has secured $30 million in venture capital funding, primarily from luxury goods giant Group Arnault, for expansion, marketing and R&D. And, yesterday, it agreed to buy two British consumer Net auction sites eSwap and Humpty Dumpty to consolidate its foothold in the consumer arena.

QXL vice president of marketing and sales Stan Laurent said there were too few reference points for listed Net companies. "People think they're all the same but the reality is very different. An ISP or pure portal or e-commerce company are very different propositions," he said.

Few people can explain the economic basis for the sky-high value of US Internet stock, especially when the fundamentals' look poor. Last month, digital music Web site MP3.com saw its market value top £1.16bn when it floated an 18 percent stake yet it has never made a profit. But its issue price of £17.50 per share proved that Wall Street was hungry for anything .com.

Laurent said numbers just aren't enough. "Milestones, in terms of staffing and upgrading technology, are just as important. Beyond financial metrics, such as cashflow, a large proportion of value is whether a team can deliver on a big promise," said Laurent. He cites some essential factors in gauging Net worth: "A substantial and proven business model, knowing how big the market is and the ability to exploit the potential of that market," said Laurent.

Looking at how Internet businesses have evolved in the US and understanding the European context is key. "There's the benefit of hindsight," Laurent added.

The US share depression still hangs over the European Net IPO market, but Saltiel believes it may not be enough to completely derail U.K. new issues. "August is a notoriously volatile month. Companies will see how the market settles in September/October or wait for February/March time," he said.

In the largely untapped European Internet stock market, .com investors are waiting in the wings with a pen and cheque book -- a little wiser and a little more wary.

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