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IPO Filter Gets Finer

Light Reading
News Analysis
Light Reading
10/27/2000

The days of the easy Initial Public Offering may be over in the optical networking market.

The venture capital world, and particularly the IPO market, have had their expectations adjusted by the public markets. Following the recent correction in the optical networking sector, private companies will be subjected to a more rigorous filtering process and more rational valuations on the way toward IPO, according to both venture capital and investment banking sources.

"The market is going to be more watchful over IPOs -- there will be a little more assessment by the investment bankers," said Babu Ranganathan, a managing partner at Apex Venture Partners. "Deals are going to be priced closer to what they should be, instead of being frivolously inflated."

So, which companies will be the first to run the new IPO gauntlet? Optical Communication Products Inc. (proposed Nasdaq: OCPI), which makes optical transmitters, receivers, transceivers, and transponders for metro area networks, plans to stage its IPO next week. The offering is expected to price between $10 and $12 per share, with UBS Warburg and J.P. Morgan & Co. (Nasdaq: JPM)leading the team of underwriters.

Another potential IPO is Optical Micro Machines Inc., which has filed its S-1 and is expected to be priced in the next few weeks. Further down the road, Tellium Inc., a closely watched core switching company, hopes to go public (see Tellium Bids for $250 Million IPO). Cidra Corp. (proposed Nasdaq: CIDC), a components manufacturer, also recently filed for its IPO (see Cidra IPO Raises Eyebrows).

Investment banking sources said that valuation techniques could become more conservative, following the lead of reduced multiples in the public market.

"You may see more of an emphasis on profitability as a criterion --and there could be a return to more traditional metrics such as price/earnings/growth ratios," rather than simply price/revenue ratios, says Conrad Leifur, analyst with U.S. Bancorp Piper Jaffray.

Another investment banking source described the environment as "skeptical" and said the generous valuations given to startups in the VC world would likely be reduced.

A commonly accepted metric for valuing IPO-stage companies has been 20 times to 25 times the value of their forward 12 months revenues, up from the high teens last year. Several venture capitalists and bankers indicate that those revenue multiples are expected to fall, following the stock market's recent correction.

-- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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