T-Online weathers the storm

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The initial public oVering of T-Online, a German company owned primarily by Deutsche Telekom, provided some respite for a turbulent technology market when its shares climbed 39% on their Wrst day of trading.
In the world's largest internet IPO, T-Online, Europe's largest internet service provider, launched its e2.9 billion oVering on the Neuer Markt in the wake of some of Nasdaq's sharpest drops. With lead managers Dresdner Kleinwort Benson and Goldman Sachs wary of the volatility of the markets, the deal turned out to be a rare success.
Keeping in mind recent IPOs such as Lycos, World Online, and lastminute.com - deals one banker described as "disastrous" - the lead managers approached T-Online with extra caution. The deal was an important one for many reasons including the size of the oVering and the brand name of the issuer. T-Online is part of the T brand that includes Deutsche Telekom and T-Mobil and is "one of the best known marketing brands in Germany," according to Paul van Issum, head of equity syndicate at Dresdner Kleinwort Benson in London. The T brand saw the issue as a kick-oV for potential larger equity issues in the future.
With hindsight, says one banker involved with the deal, the one component that ensured the deal's success was setting the price range. Erroneous reports in the media suggested that the pricing range would fall by (be)e35 to e50. Van Issum says that in reality, pricing was not formally discussed until late in the marketing process because technology stocks were so successful in December and January, and the lead managers were aware that the market could change. The range was set at e26 to e32 and was announced just before the books opened. Van Issum said that the price range matched expectations and was well accepted by investors.

The lead managers also looked to lastminute.com's failure when considering their retail tranche. Lastminute.com had oVered shares to its registered users before its listing, but a price hike before the flotation alienated those investors. Likewise T-Online intended to appeal to retail investors and speciWcally to its customers, but did not want to repeat lastminute.com's mistake.
In the end, the retail tranche was allotted 50% of the entire oVer. Each T-Online subscriber, beneWting from preferential treatment, was allocated 35 shares. A lottery for the remainder of the retail tranche determined that every third investor was allotted 25 shares. Retail investors had the option to purchase shares through the Wrst-ever e-tail syndicate in addition to the traditional method. Customers had to have full e-facilities to participate, but could then order using a special registration number.
The turbulence on Nasdaq became particularly diYcult for the lead managers once the book-building began. One experienced banker involved in the deal said it was one of the most stressful deals he had ever worked on.
German orders came in early and remained steady throughout the book-building period, despite heavy activity in the technology sector. The brand name of T-Online contributed to German conWdence in the issue, says van Issum. The German investors also didn't set price limits on their orders, which indicated good sentiment to the lead managers. European orders from the continent followed, with France, Italy and Spain the most prominent. Orders from the US and the UK were "lagging" according to one banker, and came in near the end of the book-building. Van Issum says that in the second week of book-building a lower number of investors than expected came in because of price sensitivity.
During the pricing meeting the Friday before the issue closed, Nasdaq posted its sharpest drop. Van Issum recalls that a headline in a German newspaper advised investors to pull their orders. T-Online remained cool-headed and did not take any drastic measures. As a result, even though some low-quality orders pulled from the book, other investors actually increased their orders.
The lead managers merely told investors that the pricing would be "reasonable", van Issum recalls, and investors listened. Pricing was announced at e27, not quite at the bottom of the range. Despite the many setbacks, the book ended up twenty times covered.
The allocation procedure that followed focused on investors' commitment to the after-market. Goldman Sachs also managed the disappointing World Online deal, and T-Online wanted to prevent such a failure in the after-market. Van Issum said the lead managers "scrubbed down the real demands of investors" to secure the success of the deal in the after-market.
On Monday April 17, the day T-Online would be Xoated, the Neuer Markt opened at 9am to react to the stumble of Nasdaq from Friday. Trading in T-Online was not scheduled to begin until 10am, so that the volume of potential transactions triggered by the new listing would not Xood the stock exchange. However, van Issum points out that the decision to begin trading an hour after opening helped T-Online because it allowed the Neuer Markt to respond to Nasdaq's action before considering the new issue.
By the end of the day, even though the Neuer Markt closed down 2%, the T-Online stock rose by 39% and has since retained its gain.
"Everyone would have expected T-Online to Xounder," says Joerg Illhardt, managing director of equity capital markets at Deutsche Bank, a member of the syndicate. Van Issum says that the deal sends a positive message in the short-term, but that the success of the stock is dependent on market conditions. Another banker says that he believes the high degree of volatility in the market will remain.
The success of T-Online's issue bodes well for Deutsche Telekom, with another tranche scheduled for June and a possible oVering from T-Mobil later this year to consolidate the T brand.

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