No magic formula
By : Jeffrey Sparshott
An IPO on hold.
Hoga (http://www.hoga.pl), a Katowice-based Web portal, debuted last week on the Warsaw Stock Exchange (WSE) (http://www.wse.com.pl/gpw/ang/index.html), with shares opening the day at half their May initial public offering (IPO) value. Despite the sharp fall, Hoga is relatively successful compared to some of its corporate peers that have tried to enter equity markets. The company's triumph lies in getting listed at all.
"The recent unfavorable situation on the world markets, the Polish market included, caused a decrease in investors' interest in stock exchange companies, especially IT companies," said Hoga President Tomasz Kosobucki. "What we consider successful is that Hoga shares were entirely accepted by investors during such a difficult moment on the market."
The weak market, political considerations and bad timing have trashed plans for IPOs on Poland's bourse this year, leaving many private firms scratching for capital and keeping state-owned firms out of investors' hands because equity markets are unwilling to buy into many companies or the state is unwilling to sell. Overall, IPOs have tailed off from 16 in 1997 to only five in 2000 according to the Securities and Stock Exchange Commission (KPWiG) (http://www.kpwig.gov.pl). New listings in general are waning. Last year 13 new entities were admitted to public trading, well below 1997's peak of 96. Only nine new companies have been admitted to trading so far this year, according to WSE figures.
"There are not too many entities that are wishing to enter the market," said Miroslaw Kachniewski, spokesman for the KPWiG, which decides whether companies can go public. "Generally speaking there are very few new companies."
Through the past year, Internet technology and telecom firms have been especially hard hit, with several high-profile IPO failures littering the trading floor. Warsaw-based Web portal and Internet service providor Arena, Poznan-based IT firm Emax and Bielsko-Biala hardware distributor Techmex are new economy stock-market failures. But companies in a variety of sectors have fallen victim to investor wariness, either aborting IPOs before they start or not finding enough investors once buying begins.
While Arena is possibly the most celebrated New-economy failure, less well-known Emax perhaps better illustrates the plight of IT firms. The data communication systems integrator is widely considered a stable and successful tech firm with a healthy balance sheet. Officials at Emax's Poznan offices were confident the company's IPO would raise enough capital to finance development. But before Emax could sell a planned 1.7 million shares on the WSE, investor jitters forced a revision of the issue price to zl. 48 per share from zl. 63, offering an even greater premium than originally expected. Still the June 26-29 issue fell short.
"On Wednesday I was sure that the IPO would be successful," said Piotr Karmelita, a member of Dom Maklerski BMT's board of directors and the broker in charge of the IPO. "On Thursday, it became a difficult situation so we cut the subscription price. It still wasn't enough to make the IPO successful.
"For a new company with a pure IPO I think there is no possibility to sell anything," he said, adding that investors are still waiting for the market to bottom out. "A 20% premium today could be 0% in a couple of months because the market is going down."
The economy, again
The company also blamed the market for its IPO failure.
"Most investors either withheld or reduced their applications on the primary market due to the slump on the capital market, further bad news on the macroeconomic situation in Poland, which was coming in already during the issue, and a further drop of stock market indices," said Emax President Piotr Kardach following the IPO dud.
Emax will now look to venture capital firms to raise the funds it had hoped to get during the IPO.
The IT sector has been pummeled especially hard this year: The WSE's TechWIG index is down nearly 60% since Jan. 1, indicating investor hostility toward tech and telecom companies traded in Poland. But the IT sector is not alone with IPO misfires.
The government, for example, had hoped to sell about 2.7 million shares in chemical concern Zaklady Azotowe Pulawy this July. The proposed zl. 35-zl. 40 per share issue would have been a significant source of revenue for the state and in line with its privatization program. But citing poor market conditions and acknowledging the pending change in government, officials called the issue off. Other major privatizations were stalled for similar reasons, including LOT Polish Airlines and the country's biggest bank, Powszechna Kasa Oszczednosci Bank Polski (PKO BP), among others.
"We stopped because the demand was much less than the demand expected by the state treasury," said Miroslaw Boris, primary market manager for BRE Securities, the brokerage that put together ZA Pulawy's prospectus. "As everybody knows, the market is very poor this year. I don't want to comment on this specific case, but the general situation is not that good."
Treasury Ministry Press Officer Agnieszka Dluska said there are no immediate plans to move ahead with ZA Pulawy's share issue.
The treasury saw another stock issue fizzle this year when investors did not materialize for Przedsiebiorstwo Elektromontazowe Przemyslu Weglowego ELKOP (http://www.elkop.pl), a Chorzow-based electric services and construction firm that is 25% owned by the government. PEPW Elkop still managed to list on the WSE, but only by taking advantage of its permission to trade and moving previously issued shares to the continuous trading market, said Marcin Szydlo, primary market manager for Beskidzki Dom Maklerski, the brokerage that managed the company's IPO. Otherwise, the share issue disintegrated, he noted.
One major government-led IPO still set for this year belongs to the country's largest insurer, Powszechny Zaklad Ubezpieczen (PZU). Under the original terms of the agreement among PZU, the government and the company's strategic investors, and as part of a privatization plan established by Poland's government, the treasury is to issue an IPO of stock before the end of 2001. Company officials insist that the share issue can move ahead but market conditions and elections set for Sept. 23 have some analysts doubting its prospects.
Even those companies that went public this year are, with a few notable exceptions, suffering at the hands of investors and watching share prices plummet. Hoga's share price skidded from zl. 4.50 during the IPO to zl. 1.98 to close the first official day of trading. (Between the IPO and the official listing, Polish courts must approve the share issue; in the meantime, right to shares (PDAs) are available to investors.)
"The boom on the IT market, especially the demand for dotcom shares, ended last year," company president Kosobucki said. "Now when we are dealing with a slowdown of economic growth, the investors are searching for companies that have good financial results. Internet industry companies are not part of this group right now. I think investor confidence in IT firms will return only when firms demonstrate plans that prove this type of economic activity can generate profits."
Other recently listed firms that have watched share prices suffer include Internet portal Interia (http://www.interia.pl), business-to-business Web firm Getin (http://www.getin.pl), window-maker Tras Tychy (http://www.tras.pl) and venture capital firm MCI Management (http://www.mci.com.pl).
Back to basics
Not all companies, however, have watched hopes or share values dissipate. LPP (http://www.lpp.com.pl), a Gdansk-based apparel and retail firm, sold 300,000 shares of stock and raised zl. 14.4 million ($3.4 million) in a small IPO early this year. The company's share price has since increased in value, albeit with a few bumps. The company is using funds from the IPO to expand its chain of outlets, which go by the brand name "Reserved," and to update its computer system.
Working it: Reserved clothings parent company is one of a few successful IPOs this year.
Why was LPP's issue a success?
"We are the basic economy," said Jerzy Lubianiec, chairman of LPP's supervisory board. "This New economy is not very successful presently, and I would say we work at a very basic thing that people always needed and need. We've been doing it for many years and very carefully. There is no secret in it."
Even though the market was slow, the company was confident LPP would be welcomed by investors, he said.
Miroslaw Tkaczuk, primary-market department director for DM Bank Handlowy, which prepared the IPO, said that the company's issue was helped by its uniqueness on the market there are no other firms like it trading on the WSE and because it sells real things and makes real money.
"They are connected with textiles but they are not a producer, they are more a designer than a producer," Tkaczuk said. "They create brands and new designs. Because of this, they are kind of a new economy for Poland. "And in my opinion, LPP is a real economy where you can see income and expenses and a positive cash flow and you can touch the products and buy them anywhere across Poland and in neighboring countries."
Other companies, however, are to be cautioned when using LPP as a model for success.
"Now the market is very hard and probably we would advise any company to wait a moment for better times," Tkaczuk said. "Now the indicators on the WSE are the lowest since 1998. Of course it depends on the company a good company can go with an IPO even in bad conditions for market."
In that case, according to investors most companies are not that good leaving management boards to search for other sources for revenue. Especially for IT corporations, that source is often wary venture capital firms.
"I can see where the typical venture capital group in Poland and elsewhere really burned their fingers investing in dotcom companies," said Richard Guziak, managing director for Softbank Emerging Markets in Poland, a venture capital fund. "They didn't know what they were investing in and the trend now is that companies are bending in other directions. For us, though, it's a real opportunity because we've always invested in this sector. There is real value behind new economy investments, but it will be some time before that value materializes."
In the meantime, the key for IT companies is to look into real sources of revenue and means of creating sustainable business operations, Guziak said. "If they don't do that, it doesn't matter if they find financing or not. They will not succeed."
New-economy difficulties also mean some good opportunities.
"The valuations of the companies are lower so it's the right time for buying companies and investing," said Arkadiusz Sniezko, vice president of MCI Management, a venture capital fund that focuses on tech and IT companies. "We have to be careful; because of the economic slowdown there are a lot of companies with little capital. It's hard for small companies to survive."
MCI's strategy is to invest in companies and then recover its capital, along with a tidy profit, through an IPO. But the company's recent experience with its own IPO and subsequent stock performance along with examples from other companies mean that no one in its portfolio is likely to be sold off soon, he said.
"Probably this year we will not be going for an IPO for portfolio companies," Sniezko said. The company is looking toward 2003 for economic recovery and a more enthusiastic equity market, he added.
