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— Industry Insight —
Things are finally starting to look up for the initial public offering market, and the final quarter of the year may bring us back to something resembling historical normalcy for IPOs. The emphasis is on "resembling," since we may never return to the tulip-craze days of the dot-com bubble 10 years ago, and in fact we may come to view the past 15 years of IPOs -- since Netscape Communications Corp.'s mammoth debut in 1995 -- as the exception rather than the rule in the history of initial public offerings. For four straight years, from 2004 through 2007, more than 150 companies made IPOs on U.S. exchanges each year. In 2007, that number was above 200, and the health -- or excess -- of the market was crowned by the $4.1 billion IPO of the Blackstone Group LP in June of that year.
Since the start of 2008, though, the U.S. IPO market has been positively tepid. There were barely 30 offerings in all of 2008, and only a dozen in the first half of this year. A few deals were impressive, especially the $17.9 billion debut of Visa Inc. in March 2008. But Visa is the type of household-name company that can make its own weather in the markets: Even in lean times, a Visa or Blackstone or Google Inc. can draw the attention of investors. While the rare big fish swam onto the markets in the past couple of years, the small fry were mostly out of luck, either because they had to sit on the sidelines rather than go public, or because the markets punished them once they did. The poster child for the latter phenomenon is Rackspace Hosting Inc., a well-respected business ISP that had grown revenues and profits steadily in the years leading up to its August 2008 IPO. Its strong reputation and balance sheet were not enough to spare Rackspace from getting hammered when it debuted. Offered at $12.50, its shares opened at $10.00, closed their first day at $10.01 and took until June 2009 to climb back up to the IPO price. The performance of the Rackspace IPO was symptomatic of the broader problems in the financial world as summer turned to fall in 2008. Frozen credit markets and widespread jitters among investors soured conditions for everyone in the IPO space, leading to half a year of IPO dormancy. The most obvious marker of this: Not one company filed preliminary IPO paperwork with the SEC during the first quarter of 2009. The six months since then have been a little better, marked by some of the "green shoots" that Federal Reserve Chairman Ben Bernanke talks about as harbingers of economic recovery. In the second quarter of the year, four companies filed to go public; that pace picked up in the months afterward, with 11 filings in July, 15 in August and nine in the first half of September. After just eight actual debuts in the first five months of 2009 -- including none at all in January -- U.S. markets welcomed twice that number of debutants between June and mid-September, then braced for eight IPOs in a single week late in September. Just how green are these shoots? It depends on how far back you look to make comparisons. If the reference point is the past seven quarters -- to the start of 2008 -- the current flow of deals looks positively robust. If you go back to the middle years of this decade, it looks anemic. The best comparison might be to 2003, a down year for IPOs in which the fourth quarter accounted for about as many IPOs as the first three quarters combined. Whichever historical lens we choose, considering the economic conditions that have prevailed over the past year, reaching double digits of IPOs in a month should probably be a cause for celebration. This year is shaping up like 2003, and it is easy to predict that the fourth quarter will see greater IPO activity -- both more debuts and higher valuations -- than the whole year leading up to it. IPO filings are typically a good leading indicator of IPO debuts; if that pattern holds, the IPO markets could be in fine shape for the end of 2009 and the early going of 2010, because third-quarter 2009 beat the previous four quarters combined both in the number of filings (more than 30) and their average value (around $400 million). This trend of more and better valuations has been supported by improvement in the economy. Whether we are seeing a real recovery or just the end of a long process of bottoming out, it seems clear that investors, business leaders and policymakers are breathing much easier now than they were a few months ago. This improvement has been reflected in the movement of major stock indexes, which have climbed pretty steadily since going through deep troughs in March 2009. While there can be no guarantees in IPO-land, the table looks set for things to get stronger from now through the first half of 2010. A stocked pipeline of filings and healthy equity markets are indicators of something bigger that's prized throughout the IPO arena: predictability. That's precisely what has been lacking over the past several quarters. It was bad enough that the economy turned sour in 2008; it was worse, in terms of predictability, that it happened during a hotly contested U.S. election season that promised very different paths for corporate regulation and financial oversight depending on who got elected. And then came a series of highly unpredictable -- even unthinkable -- events like the failure of Lehman Brothers Holdings Inc., the selloff of Merrill Lynch & Co. and Washington's bailout of major banks and carmakers. It was hardly a ripe environment for bringing a fledgling company to the public equity markets, as the IPO of Rackspace so painfully demonstrated, and it's no wonder that investors rushed for the exits. By now, the processes of economic recovery are under way. For better or worse, depending on your viewpoint, we have much more clarity on Washington's likely actions. Major banks no longer teeter on the edge of collapse. And investors have bid up the Standard & Poor's 500 by more than 25% in the past six months. These conditions favor a steady cadence of IPOs -- something dear to the hearts of investors, underwriters, venture capitalists and entrepreneurs alike. Beyond that, they enable an occasional IPO splash by a company with less-than-stellar financials but strong promise for the future. Case in point: A123Systems Inc. saw its shares rise by more than 50% during its first day of trading in late September. A123 makes cutting-edge batteries for use in everything from power tools to hybrid electric vehicles, and it has long-term deals to supply batteries for electric buses made by Daimler AG and for the Volt automobile being developed by General Motors Co. What A123 lacks is steady revenue, yet investors were willing to take a flier on it because of its technology portfolio and its alliances with industrial heavyweights. Now imagine what could happen for the IPO of a household name like Hyatt Hotels Corp., which filed in August to make a $1.1 billion IPO. The moral of the story: The IPO world can handle the "new normal" of a tepid economy, so long as there is enough stability for all parties to feel that they can gauge the risks associated with an IPO. Canny businesspeople will figure out how to do this even if we are in a long jobless recovery -- or a restructuring of the U.S. and global economy more fundamental than we can now imagine. Does this mean that the salad days for IPOs are right around the corner? Maybe not. But at this point, a couple of quarters of boringly steady IPOs, free of economic catastrophes, would be a welcome relief from the turmoil and stagnation of the past two years. Tim Walker is the social media manager at Hoover's Inc. where he leads the quarterly IPO analysis. |
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