by Andre Peschong

Looking at the fallout on Wall Street, there has been great change in the financial industry and, in turn, some unintended consequences. The hedge funds that once numbered over 7,000 (my unofficial estimate as I couldn’t find a substantiated number) are now pared down to around 3,000. Venture Capital has retreated to higher ground by doing larger deals and more 2nd, 3rd and 4th rounds into existing portfolio companies. Private equity houses have largely been untouched, but they are suffering from the lack of exits. Three of the largest investment banking firms have gone under or been absorbed by larger traditional banks.

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by Tom Taulli

Recently, the CEO of GM (NYSE: GM), Rick Wagoner, extolled the importance of electric cars. It does seem like a no-brainer, especially in light of environmental concerns and the soaring price of crude. In fact, the mega car company is exploring many alternatives, such as fuel cells, ethanol, hybrids and so on.

Of course, it’s all good news for a variety of companies in southern California, which are developing next generation car technologies. “Southern California is the home to a myriad of design studios for all the major car companies,” said Andre Peschong, who is a principal at Bridgewater Capital. “There is a talent pool of engineers, CAD design specialists and let’s face it, a car culture.”

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by Andre Peschong

I see parallels between the market and the deal-making environment that often accompanies golf. Is it any wonder that so many business deals get done during a round?

Golf is a game of confidence and concentration. There’s good concentration, such as setting up to a shot, and bad concentration, such as wondering when the beverage cart will pass by.

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by Tom Taulli

Equities are ailing. And yes, the IPO market is basically dead.

But there is a bright spot: Special Purpose Acquisition Corporations (known as SPACs). Essentially, this is a new-fangled public offering.

So, what’s going on here?

Well, I had a chance to interview Andre Peschong, who is a veteran investment banker and has his own blog, Deal Flow Diaries.

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by Andre Peschong

Angels are the new venture capitalists. Sound like a bold statement? Not so if you look at recent statistics.

Angel investing has been on a consistent upswing since 2003, and it is attracting high-net-worth individuals who want to take a more proactive approach to early-stage investing. According to Ernst & Young, since 2000, the number of venture capitalists has declined by 50% while the number of angel groups has more than doubled.

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We all see the market grasping for some piece of news that will hopefully signal a market direction or at least a short term move. The bad news seems to be mounting not only in the US but also in the world economies. Mounting debt is still plaguing a recovery, while at the same time putting the inflation watchers on alert.

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Amid a budding revival for initial public offerings this year, there have been no drkoop.com sightings, nor are there any IPOs in the pipeline akin to those of Internet toy retailer eToys Inc. or online grocer WebVan Group Inc., the two other famous Internet “growth stocks” of the late 1990s that ultimately went bust. Such speculative offerings simply aren’t possible these days. In fact, without profits and a high profile in a major technology sector, venture capitalists and entrepreneurs won’t find any takers among public investors. Says Venky Ganesan, a principal at Globespan Capital Partners: “Your average cookie-cutter software company with $40 million to $50 million in revenue isn’t going to go public unless they have a unique story. The underwriters will take you, but you will become a public market orphan, which doesn’t create value for anybody.” Ganesan should know. Earlier this month he dropped plans to seek a public listing in 2005 for one of his firm’s portfolio companies, Trigo Technologies Inc. Instead, he chose to hook up with IBM Corp., which bought the maker of product management software for undisclosed terms March 9.

Ganesan, also a Trigo co-founder, says that despite the improved atmosphere for tech IPOs, the public market still isn’t overly friendly. He says compliance issues instituted in the past few years by federal regulators have made things more difficult. And for companies with market caps below $750 million, it’s tough to get an investment bank to institute research.

Nor is the year’s most eagerly anticipated IPO, Google Inc., going to change the situation. “I think there is a quality filter in the market at this point that’s taking out the crud,” says Tom Taulli, author of “Investing in IPOs” and co-founder of CurrentOfferings.com. “Institutional investors are paying attention to what they’re investing in right now. They want something substantive.”

Taulli says companies that can go public today are profitable or close to profitability, with a significant share of a large market or potential large market, along with a strong management team. Chances are, then, that only a few offerings will make the grade this year, analysts say, despite an improving market.

But that hasn’t stopped preparations. According to Renaissance Capital Corp.’s IPOHome.com, there were 56 new IPO filings in 2004 through March 16, the most in a quarter since 75 companies filed to go public in the fourth quarter of 2000.

These 56 filings compare with only six in the first quarter of 2003 and 105 in all of 2003. Many of the 56 filings are in healthcare or biotech, a tech sector that has always been speculative. In contrast, successful information technology offerings must be more substantial.

Consider Kintera Inc., a software maker for nonprofit organizations that went public in December 2003. It has been the top-performing IPO over the past 12 months, according to IPOHome.com, with a total return of 104% from its offer price as of March 16. The reason: Kintera, which increased its revenue 300% from 2002 to 2003, to $8 million, has several things going for it, including its co-founder and CEO, Harry Gruber, who has taken four other companies public. Teva Pharmaceutical Industries Ltd. bought one of the companies, generic drug maker Sicor Inc., for $3.4 billion last year.

“When we started Kintera, we did things as a company knowing that we would eventually go public,” says Gruber, who explains that the company set up its accounting practices and instituted other standards that a public company would do. Kintera also had a “high-profile” board, according to Gruber, and established relationships with underwriters early on.

Gruber says he thought going public late last year was easier than in some prior years because “in a market like this you have to have your act together.” Yet the CEO predicts companies will begin to push the envelope and see whether the window is open for second-tier companies that may not have all of the prerequisites of the current crop of IPOs.”The playing field may have changed due to the success of Kintera and other companies,” he says. “Whether that will lead to one-step-down companies going public, it’s hard to tell. It’s an experiment all the time with Wall Street.” The market has been on edge to hear Google’s story, though the Mountain View, Calif., company’s search provider has yet to confirm widespread expectations it will go public this year. But analysts say its impact on other tech companies will be minimal. “There aren’t that many more Googles out there,” says Paul Bard, senior analyst with Renaissance Capital. “It will be a positive for the markets, but as for Google being a coming-out party for everyone else, I don’t think that’s the case.”

Still, some companies in the pipeline may do well when they debut. Customer relationship management software company Salesforce.com Inc. of San Francisco is the most anticipated tech offering other than Google and should go public soon. “The recent selloff in the market is making things a little more challenging,” Bard says. “But I still think there are quality companies out there.”

Other tech companies that recently announced IPO plans and are expected to make it to the public markets are Blackbaud Inc. of Charleston, S.C., which designs software for not-for-profit organizations; Blackboard Inc., a Washington, D.C.-based maker of educational software; Blue Nile Inc., an online jewelry retailer operating out of Seattle; and LSI Logic Storage Systems Inc., the Milpitas, Calif.-based spinoff of LSI Logic Corp.’s disk storage systems and components business.

Windows of opportunity for public listings can close quickly, however, as a clutch of high-tech companies from China have learned. Strong gains among Chinese technology companies last year, including Chinadotcom Corp., Sina Corp. and Sohu.com Inc., along with stirring debuts in 2003 from online travel company Ctrip.com International Ltd. and China Life Insurance Co. Ltd., encouraged other Chinese companies to go public this year.

The results suggest interest may be waning. Linktone Ltd., a Shanghai mobile phone service provider that went public March 4, saw its shares rise 24% on its first day of trading but more recently was down 30% from its offer price. Hong Kong-based TOM Online Inc., which provides its products and services through mobile phones, went public a week after Linktone, and its shares are down more than 20% from where they were priced.

The most recent Chinese company to go public also disappointed. Shanghai chipmaker Semiconductor Manufacturing International Corp. never traded above its $17.50 offer price when it made its debut March 17 and closed down 11% its first day on the New York Stock Exchange.

“There was just a lot of supply coming out when the stock market was in a correction,” Taulli says. “There’s still a tremendous amount of interest in China. It just got a little ahead of itself.”

That might happen, too, whenever the shares of Google and Salesforce.com do come to market. But a reviving IPO market, even if it overshoots, does have its benefits for wannabe public companies. Just ask Globespan’s Ganesan. “Going public is a financing event, not a liquidity event,” he says. “What IBM offered Trigo was a financing event and a liquidity event that created a lot of value.”

Being a dot-com is suddenly back in fashion.

After two years that saw many companies change their names to drop the tarnished suffix from their corporate names, potential IPOs seem to no longer feel there’s such a stigma. In the last several weeks, several companies with “.com” at the end of their names have filed for initial public offerings of stock, including salesforce.com Inc., Shopping.com Ltd. and Advertising.com Inc.

Is this the start of a new Internet bubble? Not necessarily, analysts say. But companies have been emboldened by the solid performance of existing Internet stocks over the past 12 months. Yahoo Inc., for instance, has seen its stock more than double over the past 12 months, a move capped last week by its announcement of a two-for-one stock split. Such successes have removed some of the stain associated with being a dot-com.

“It’s kind of hip to be dot-com again,” said Tom Taulli, manager of Oceanus Value Fund, a hedge fund based in Newport Beach, Calif. “It’s back in style. It’s retro.”

It’s also a marked change from the recent past. In the 1990s, companies fell over themselves to add a “.com” to their names. In 1995, 1-800-Flowers, one of the best-known telephone florist brands, became 1-800-Flowers.com Inc. in advance of its 1999 IPO. That Web name came even though the company’s telephone sales at the time — and even now — are greater than those generated online.

But, once the bubble burst, many companies had a change of heart. Even those companies that arguably should have had a dot-com in their name decided to drop them. Netflix Inc., the online movie-rental company, originally filed to go public in April 2000 as Netflix.com. But the company withdrew its IPO three months later, citing poor market conditions. About two years later, it successfully went public, though without the dot-com suffix.

The new dot-coms planning IPOs have had the chance to change their names and didn’t. In fact, Shopping.com, an Israel-based online comparison-shopping company, did change its name, but remained a dot-com. The company was known as DealTime.com Ltd. when it filed in March 2000 to raise $50 million through the now-defunct Robertson Stephens securities firm. The company withdrew that offering in 2001 and later changed its name. The company, which re-filed its IPO in late March, plans to raise about $75 million through Goldman Sachs Group Inc. and Credit Suisse Group’s Credit Suisse First Boston.

The recent wave of dot-com IPOs comes as other Internet offerings have performed well. In December, Ctrip.com International Ltd., a Chinese online travel agent, became the first company in more than two years to trade at more than double its offering price in initial trading.

Furthermore, the added breed of dot-coms don’t appear to be the kind of high-risk enterprises of past years, given that several are profitable. Take salesforce.com, a customer-relationship software company based in San Francisco. Over the first nine months of last year, it reported net income of $4.7 million, on revenue of $66 million, according to offering documents filed with the Securities and Exchange Commission.

Likewise, Advertising.com, an online marketing company based in Baltimore, is in the black, reporting net income of $18.7 million on revenue of $132.2 million in 2003, according to SEC filings.

Neither salesforce.com nor Advertising.com has set initial price terms on their offerings, which are being led by Morgan Stanley and Goldman Sachs, respectively.

There remains the risk that a spurt of offerings from Internet companies will cause less-established Web companies to try their own hands at IPOs, but it’s unlikely investors will see a flood of companies identifying themselves as dot-coms.

“I’m not sure there will be that phenomenon where you see companies slapping on a dot-com and expecting to get a premium for it,” Oceanus’ Mr. Taulli said.

Investors are having a touch of accounting deja vu, but the less-than-forthcoming financial statements are not coming from American companies this time but from Chinese ones.

Reports have been trickling out that some of the hottest Chinese initial public offerings misled investors with false or incomplete financial statements, leaving some experts murmuring about the bursting of another market bubble.

Tom Taulli, a U.S. securities lawyer and an expert in corporate finance, said investors were right to tread very lightly around the new crop of public Chinese companies.

“The Chinese government is involved in taking a lot of deals public together pretty quickly,” he said. “I don’t think I’d trust the numbers. I think there’s an Enron in the making in China.”

After being whipped into a frenzy by months of hype, investors were disappointed last month after several Chinese stocks stumbled.

“The appetite has turned to nausea,” said David Menlow, president of Millburn, N.J.-based IPO Financial Network, a research group specializing in young companies. “Clearly at this point investors have said, ‘We do not want to be involved in virtually any of these companies at the valuations afforded to them.’ ”

But the wariness is not only because of rich valuations — that was the case for many technology stocks for much of last year, with little ill effect. Investors took fright this month because the specter of accounting issues raised its head.

Netease.com Inc., an Internet technology company, announced last month that it was under regulatory investigation for allegedly overstating its 2000 revenue. The shares fell 12%.

China Life Insurance Co., which set off the IPO frenzy with a $3.5-billion offer in December, was hit by an investor lawsuit that alleged it had concealed financial mismanagement during the marketing of its offering. Its shares dropped 3%.

Then Semiconductor Manufacturing International Corp., the country’s largest chip maker, went public with a dual listing in December. Its shares plunged 8.7% on its debut in New York and 8% on its Hong Kong opening.

As with many Chinese companies, concern about what was left unsaid in the firm’s financial statements was already present. These worries increased when SMIC’s chief financial officer, in comments to investors, contradicted its filing with U.S. regulators. She said the company would need less capital to meet expenditure than stated.

In another sign of aggressive accounting, one investor noted that the company was taking five to 10 years to depreciate the value of its assets — a substantial increase from the industry average of four to five years. The difference, which pays little heed to the rapid pace of technological change in the chip industry, will serve to boost the company’s earnings.

An additional worry about SMIC has been that its legal base is the Cayman Islands — leaving investors unable to sue in case of misdeeds. Some investors have been especially irked by the timing that has helped young Chinese companies. Several said China Life’s IPO came at the tail end of market enthusiasm for riskier fare.

The stock went public after several months of strong IPO performance had primed investors to expect a healthy first-day gain as the norm.

Linktone Ltd. and Tom Online Inc., two companies catering to users of cellphones and the Internet, have posted lackluster performance since their recent IPOs. Linktone has slipped 46% since its IPO in early March, while Tom Online has shed 14% since its debut last month.

“The only one that came and worked was China Life,” said Ben Holmes, a money manager at Protege Funds who specializes in IPOs and secondary offerings. “That set the tone and set people up to buy China. China is this cash inferno now. They’re raising money in our markets and leaving scorched people behind. I’m going to stick to the U.S. market, where I can get the nuts and bolts.”

Among the nuts and bolts investors expect are more transparent accounting and more legal protection for minority shareholders.

A few critics warned even before the much-anticipated China Life IPO that investors should tread carefully, citing the skimpy financial statements as one of the reasons.

There is also concern that companies in which the Chinese government still holds a stake, such as China Life, could get a boost from their big shareholder. The critics warned that it would be difficult to know how much the government was helping, and what the consequences would be when it stopped.

Menlow noted the disconnect between investors’ high expectations for the future of Chinese business, with its 1.8 billion consumers, and the performance of the stocks.

“This is a difficult concept for us to accept because of how the Chinese stocks were being supported by all the hype,” he said. “People thought this was going to be the second coming of a strong foreign market. But these deals have had pitiful performance. These have been successful for the issuer only.”

Here come the IPOs again.

After a three-year drought, initial public offerings are creeping back into the market. Through the middle of March, 33 companies listed their shares on major U.S. exchanges, up from only five companies over the same period in 2003.

Last year, the market saw only 83 new listings raising $16 billion–the slowest full year for IPOs since the 1970s, according to Thomson Financial.

Then IPO volume began picking up last summer, as the markets signaled a renewed interest in equities. The Nasdaq Composite jumped 50% in 2003, while the S&P 500 stock index climbed 26%. Capital inflows to mutual funds topped $80 billion, putting fund managers on the lookout for new investments–and, ultimately, new companies in which to invest. Tack that on to the encouraging 4% economic growth in last year’s fourth quarter, and you’ve got a good environment for funding new companies.

But don’t look for a repeat of the late-’90s frenzy. In 1999 alone, for example, 486 companies went public. Marshall Sonenshine, managing partner of Sonenshine Pastor, a New York investment banking advisory firm, says we’re currently in an IPO “renaissance,” not a boom.

Sonenshine says the current IPO calendar is more diverse–both in terms of sector and geographical representation–and listing companies are of higher quality today than they were five years ago. Yet the deals are also smaller: This year, only two have topped the $1 billion mark. The year’s largest IPO so far–Shanghai-based Semiconductor Manufacturing International (nyse:SMI)–raised $1.8 billion on March 11 but is down 15.5% since its listing on March 17. In second place is Assurant (nyse: AIZ – news – people ): The insurance company and Fortis spinoff was worth $1.76 billion; it is up 8.2% since its Feb. 4 listing.

Many market watchers agree: Forget the frenzy that was. Don’t expect the free-for-all craze that ushered in the last IPO boom. Even so, some of the most anticipated offerings this year are online businesses, such as retail site Shopping.com, electronic stock exchange Archipelago and jewelry seller Blue Nile. One Internet-only commercial bank, The Bancorp Bank (nasdaq:TBBK), is up 41% from its $12.50 offering price.

“In the late ’90s, there was a mania,” says Tom Taulli, a finance professor at The University of Southern California. “That’s not the case today. Some people are skeptical. During the boom time, a lot of companies that went public shouldn’t have.”

One example is Pets.com, the online pet-products outfit that raised more than $100 million–then went bankrupt only a year after listing. TheGlobe.com was another hall-of-shamer. Developed in a Cornell undergraduate dorm room by a couple of twenty-somethings, the online chat board was sold to investors as a “concept play,” or on the expectation that there would be a market for it. Revenue and profits never materialized.

“The quality bar for companies that listed in the boom days was dramatically lowered,” says Elizabeth Demers, assistant professor of accounting at the Simon School of Business at the University of Rochester.

This time around, expect to see maturer companies filing for public listings. During the boom, one-quarter of companies that went public made money; today 75% are profitable. On average, says Quinten Stevens, co-head of equity capital markets at J.P. Morgan Chase, companies listing today have 18 years of operating history, versus five years in 2000. “There has been a dramatic improvement in terms of the maturity and quality of companies that are being brought to market,” he says.

Listings are more diverse, too. At one point during the boom, technology stocks accounted for 60% of IPOs, according to Linda Killian of Renaissance Capital, a Greenwich, Conn.-based IPO research firm. That’s not the case today. So far this year, technology represents only 29% of the companies that have listed; health care, with 32%, is the most common sector to list. There’s also a good mix of energy, financial services and communications companies.

For those who thought the crackdown on investment banking research and IPO practices would bring about major changes, think again. The top global issuing banks are still Goldman Sachs (nyse: GS – news – people ), Credit Suisse First Boston, Morgan Stanley (nyse: MWD – news – people ) and Merrill Lynch (nyse: MER – news – people ). Citigroup (nyse: C – news – people ) dropped out of the top five last year, according to Thomson Financial, deferring to Arlington, Va.-based Friedman Billings Ramsey (nyse: FBR – news – people ), which was strong in real estate- and financial-related offerings. But the world’s biggest bank by assets will likely rejoin the upper echelon in 2004.

And, unlike many other financial services, IPO fees have hardly come down. Groundbreaking offering techniques, such as the OpenIPO auction-process at San Francisco’s W.R. Hambrecht, haven’t made much movement either.

“I think that we’re seeing a comeback in the IPO market that is consistent and meaningful,” says Linda Killian of Renaissance Capital. But, she adds, there is more skepticism today. “With the exception of a handful of the deals, investors have been very careful with what they are willing to buy, and at what prices they are willing to buy them.”