Internet Capital lacht

These were a few highlights of an investing chat with Taulli presented Aug. 4 by BusinessWeek Online on America Online, in response to questions from the audience and from Karyn McCormack of BW Online. Edited excerpts from this chat follow. AOL subscribers can find a full transcript at aol.businessweek.com/chat .
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Hot IPOs, M&As, and More
Wednesday August 10, 8:26 am ET


The stellar debut of Baidu.com (NasdaqNM:BIDU - News) on Aug. 5 has put sizzle back into the IPO market. Other new issues that recently lured investors include BabyUniverse (AMEX:BUN - News) and Golf Galaxy (NasdaqNM:GGXY - News), and plenty more will follow in the coming weeks. Says author and venture capitalist Tom Taulli: "This can't be an anomaly. It's a sign of strength in the whole market. It bodes well for everyone."
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Taulli, who's currently an analyst for San Francisco investment bank Instream Partners, also thinks the brisk merger activity will continue. He sees more deals brewing in the banking and credit-card sectors, as well as among Internet outfits.

For his portfolio, Taulli tends to gravitate to small-cap stocks, given that they offer the most potential rewards. Stocks that he picked up recently include Blackboard (NasdaqNM:BBBB - News), a developer of software for universities and other types of learning institutions, and Bankrate (NasdaqNM:RATE - News), a provider of rates for mortgages and CDs. He also likes Motorola (NYSE:MOT - News), the well-known cell-phone maker.

These were a few highlights of an investing chat with Taulli presented Aug. 4 by BusinessWeek Online on America Online, in response to questions from the audience and from Karyn McCormack of BW Online. Edited excerpts from this chat follow. AOL subscribers can find a full transcript at aol.businessweek.com/chat .

The market returns on IPOs have actually also been very, very good this year, one of the strongest in the equities sector in 2005. The time to play IPOs is when the area is drab, and investors are negative. You get attractive valuations and solid companies with solid financials and prospects. They're the only ones who can go public in such an environment.

Going forward, I'd be more selective about IPOs, since more companies will be out there. But I don't see a multiyear rally in the market. What I do see is IPOs going cold, going warm, going cold, etc. The way to play this market is when everyone doesn't want these things, think about buying.

Q: What IPOs look good to you in the next few weeks?

A: The one that will grab a lot of attention is Baidu (NasdaqNM:BIDU - News). The company is based in China and is the largest search engine there.

Interestingly enough, about a year ago Google (NasdaqNM:GOOG - News) purchased an equity stake in Baidu. At the same time Google is pushing hard into China and what should be a high-growth market for the search-engine industry. In 2004, Baidu did $13.4 million, and revenues are ramping. In 2004, they were good, but this year, they will likely rise to over $35 million.

The Chinese search market is still in the early stages, but it's growing at a staggering rate. From one report I've seen, search queries are expected to grow 49.8%, compounded per year, between 2005 and 2007. Conducting searches in China is no easy feat, because of the complexities of the language.

Also, Baidu uses a business model similar to Google, in that it charges advertisers for search words. The problem in China is that many businesses don't even have credit cards. There are thousands of third-party providers that help businesses with these search words.

There is also the foreign risk of investing in a Chinese company, but given that the IPO market is doing quite well right now, and given the surge in Google's stock, I believe Baidu will be an excellent position this year.

Q: Are there any new issues coming that investors should avoid?

A: That's a good question. There's nothing that jumps out at me as being a company to stay away from. I think the quality of IPOs is still strong, but as we go into the rest of the year, that may change as investment banks see an opportunity to take out more companies. The August bunch looks solid in terms of quality, but you'll probably pay a premium price for them.

However, if you do get the opportunity to invest in these at a premium price, this is a great way to make money. But it's not always easy for the individual investor to get IPOs at the offering price.

I did, however, talk to somebody today who was able to get two IPOs and make 30% on each of them. So it's possible, but this will get more difficult as brokers realize these are hot commodities again and will start giving the opportunities to those who have more money.

The other thing I've noticed in the IPO market is that small-cap IPOs are making more of a comeback. This week, BabyUniverse (AMEX:BUN - News) had its IPO, and it has done quite well. Actually, I think in the last few days it's up 30%. So that company has done well, and it's a small company with a small underwriter.

There was another small IPO, Golf Galaxy (NasdaqNM:GGXY - News), that's up over 30% this week. So I wouldn't be surprised to see more small-cap IPOs come into the market. As an individual investor, be careful with these small offerings. They tend to be of lesser quality (though not always), and as the market turns they can be extremely volatile.

Q: How can the average investor find information on the next IPOs and get in on the ground floor?

A: There are different sites on the Internet that have IPO filings. One of the more common sites is called IPOhome.com. There are lists of recent filings, there are lists of recent pricings, and other such data that are extremely helpful for IPO investors.

There's another site called IPOmonitor.com, but they charge for the information. So from IPOhome, you can find out what the upcoming IPOs are and get some summaries of those.

But if you want to get much more in-depth information, you can download the company's prospectus, which means you get the financials, the business plan, the bios, an incredible amount of information to help make an investment decision. It can be intimidating to read these documents, because they're written by attorneys and CPAs, but there are resources, including IPOhome.com, that can help you read these.

If the company makes sense in terms of an investment, the hard part is trying to get shares of the IPO. It would be extremely difficult to get shares for a company like Baidu at the opening price. But the smaller companies are easier in this respect.

My friend who got two initial IPOs got them because they were small. Find out who the underwriters are, which you can find in the first few pages of a prospectus, and find out from them if there are available shares of the IPO. If there are, you'd have to open an account with them.

You have to keep in mind the unwritten rules, however. An underwriter doesn't typically want anybody to flip an IPO -- that is, sell it on the first day. If you do, that's likely the last IPO you'll get at offering price. So it does take a lot of work, and a lot of calling around, but you may get lucky and get some shares.

Q: Last week we saw 13 IPOs, the strongest presence since February, and surprisingly high for the summer. Is this an indication of a positive upswing in the market and the economy, or simply a coincidence?

A: My opinion is that the IPO market is a follower, not a leader. When liquidity comes into the equity market, it spills over into the IPO market, and that usually means a rally has legs.

We're in the early stages of a comeback in the IPO market, and what is very encouraging is that the rally is occurring in August. I can't even remember the last time we had a solid August, and I've followed the IPO market a long time. This can't be an anomaly, it's a sign of strength in the whole market. It bodes well for everyone.

I think there's a bit of irony, too. Ten years ago, in August, we had the Netscape IPO, which inaugurated a huge bull market in the NASDAQ and meant five years of strength in the IPO market. I'm not saying this will happen again; I doubt it, but I do think investors are willing to take more risk and are looking for growth-oriented companies which you see



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