Technology Companies Dominate Small-Cap Market

<B> Technology Companies Dominate Small-Cap Market</B>

By Cheryl Rosen

Technology companies are driving the small-cap market, but many were running into heavy flack stocks even before the current market fall, according to Goldman Sachs vice president Mark Friedman. The Russell 2000 index of small-cap stocks, which includes most of the IPOs in the travel industry, is "skewed heavily to technology; it's remarkable how many are tech-related," he said.

A goodly portion of the IPOs of the group--49.3 percent in the first quarter of 1999, 39.3 percent in the second and 36.6 percent in the third--priced above their expected initial filing range. But the Russell 2000 still "drastically under-performed the rest of the market," Friedman said.

Speaking on a Wall Street panel at the New Frontier in Travel Distribution conference in late September, Friedman noted that airline stocks are at or near all-time lows and have fallen dramatically since spring. They now are trading at roughly seven times next year's earnings--a "very low evaluation for an industry that has gotten its act together," he said. But fuel prices are up and yields are down, especially in the eastern United States and on transatlantic routes. As a result, "airlines are being very aggressive about trying to cut distribution costs," developing their Web sites and using multiple channels, like Priceline.com.

The two GDS stocks, Galileo and Sabre, "were the darlings of Wall Street for 18 months," more than doubling in value between their launch and September 1999. The departure of Sabre CEO Michael Durham was a "catalyst for a drop in share price"--though the stock has since recovered--while Galileo "was impacted by concern over a weakness in bookings."

Still, Friedman argued, going public offers real benefits to travel technology companies. Among them: the ability to attract and retain the best people by giving them stock options, capital to grow and "a benefit that can't be underestimated," the increased visibility a Wall Street address adds to a technology player.

Unlike smaller travel technology offerings, Sabre and Galileo "were attractive because they were large cap, offered consistent growth and were not too risky," Friedman said.

Friedman declined to comment on the upcoming Expedia IPO, in which his firm is involved, but he called GetThere.com "an interesting story, because it's a business-to-business application and I think there's a huge potential out there. That market over time will be immense, and if GetThere can penetrate it, it will be powerful."

He also noted that "a lot of people like the Sabre story because of the diversity of its earnings," with IT consulting as well as agency and online booking, "and Sabre's been able to sign some major contracts despite being 81 percent owned by AMR. That adds a level of excitement to the story."

"In general," he told BTN, "it's a good time for IPOs in the sense that there are a lot of benchmarks of other companies out there, and an understanding of how new ones will be positioned." Still, he noted in September, before the market began to fall, "It's much better to go out in a friendly environment. The last thing you want is all the downward pressure of a tough market working against you. Momentum is very important."

Lehman Bros. senior equity research analyst Karl Keirstead, however, said he's "not a big fan" of Sabre or Galileo, though he called Sabre "modestly undervalued." He called 1999 "an ugly year" for GDS stocks, in which the airlines' struggles to revamp the distribution channel caused concern on Wall Street. While Sabre had a good revenue stream from its work on Y2K repairs, that is now coming to an end, and software sales are weak. Galileo's domestic bookings were down in the second quarter, though its international business remained strong, and its transition to an internal sales force to replace the United and US Airways teams was a problem. He also noted that with Amadeus beginning public trading and an expected IPO from Worldspan, the industry could have four publicly traded GDSs by next year.

But Bear Stearns managing director of equity research Jim Kissane was decidedly more bullish. He expects Sabre to generate 15 percent growth for the next few years and finds the stock "very attractive," and Pegasus, with its 70 percent market share of electronic hotel bookings, to also show "extremely strong" growth. "The Internet is going to snowball," he said.

Sabre's Eric Speck noted that going public has brought the GDS greater rewards for employees, much more focus on developing forecasting skills, much more emphasis on quarterly performance--but an "uneven competitive playing field in which private competitors have greater freedom." And Pegasus' John Davis added, tongue in cheek, that an IPO also brings "currency for acquisitions, very large legal and accounting bills and a calendar based on four months." On the downside, being public means losing "the ability to invest in things that won't make money in six months."

For online vendors, said Priceline.com executive vice president of finance Paul Frances, going public "is a significant branding experience," and the exposure it brought helped the company sell 50,000 air tickets a week. Still, he noted, "it's a big distraction that shuts down senior management.