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Monday, October 4, 1999 Published at 16:14 GMT 17:14 UK

Business: The Company File

Net shares: a good catch?

QXL must beat off competition to be successful, say experts

Anyone with a mind to making a quick profit on the stock market may well be eyeing up online auction company QXL.

The company is hoping to raise almost £70m with a listing in London and New York.

As the deadline looms for applying for shares, the question everyone involved will want to know is: is it likely to prove a good investment?

Investors in some Internet company flotations have made quick, fat profits overnight. The fear that long-term investors hold is that while the shares may initially perform well, these gains will be erased on the first hint of negative news.

At first sight, things are not too promising for QXL: its valuation has already been halved since it was first mooted, to a range of between £212m and £242m. This drop mirrors falling Internet share prices around the world.

[ image: Freeserve was the UK's biggest Internet floatation]
Freeserve was the UK's biggest Internet floatation
The first, and biggest, UK internet floatation was that of Freeserve, which has been something of a riches-to-rags story.

There was great excitement in the City at the prospect of shares in the UK's biggest Internet Service Provider and many Freeserve customers scrambled to buy shares.

At the launch price of 150p, they were 30 times oversubscribed.

An initial surge saw the shares leap 37% on day one.

Anyone lucky enough to be allocated a slice of the stock was able to pocket an instant fat profit.

The share price peaked at 244p on 2 August.

But then as the company reported continuing losses, shares began to plummet and hit a record low of 135p nearly two weeks ago.

The slide has also been driven by increased competition from other internet service providers joining the subscription-free bandwagon.

The shares are now hovering just below their launch price.

Analysts warned at the launch that they were overvalued, suggesting 60p-80p would be a more realistic price. But with no precedent, no-one was to know for sure how successful they would be.

eXchange changes course

The second-largest Internet flotation went the same way as the first.

Within minutes of trade opening on 6 August, the price of shares in Internet-based financial services firm eXchange Holdings rocketed more than 10%, from 200p to 226p.

But as interest fell away, so did the price. Shares dropped in the first month of trading to significantly below their offer value.

This came even though the eXchange reported operating profits of £4m last year on sales of £16.6m.

One cause of the drop may have been large falls in US Internet stocks, which have rarely seen extended periods of settled prices.

[ image: eBay investors are smiling]
eBay investors are smiling
By contrast, anyone who bought shares in American auction site eBay a year ago, could now be dining out on the profits.

Since its flotation, the stock has risen from $8.43 a share to a high of $234 in April.

The company makes profits easily: its overheads are low, as it brings buyers and sellers together but does not actually handle merchandise.

But even eBay shares can react to the threat of competition. On the announcement of rival auction site FairMarket, eBay shares tumbled $8.44.

AOL and Amazon are perfect examples of Internet financial success stories, as they are so innovative, according to investment analyst at Barclays Stockbrokers, Elizabeth Klein.

And she says the big question facing QXL - as faces the others - is whether it can beat off competition.

Secrets of success

"Whether they will succeed, I can't say. I think it's extremely interesting proposition. None of the American companies has a distribution network in Europe."

Freeserve, however, has said it plans to move into the online auction business - which could provide some stiff competition.

Ms Klein believes the secret of a commercially successful Internet site is quality content and professional execution.

"You have to keep people online and you have to deliver well," she says.

"However great the information you're giving people is, it's no good if they can't access it or read it."

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