IPO market gets groove back

The IPO market is starting to stage a comeback, with a string of big offerings expected this week, the strongest since March 2008.
The $15.8 billion offering by General Motors Corp. on Wednesday represents the largest initial public offering since Visa Inc.’s $17.8 billion offering in 2008.
The GM deal also tilted total IPO volume for the year, now above $35 billion, ahead of the last two years, signaling a solid comeback, if not yet a full recovery, according to market watchers.
“The recent activity does reflect a turnaround for the IPO market, but we’re still not back to normal levels,” said Linda Killian, principal at Renaissance Capital LLC.
Ms. Killian said that the IPO pipeline suggests a strong finish for the year, which has already seen 128 IPOs, double the number of IPOs last year and more than four times as many as in 2008.
However, she added, the pace is still well below the recent peak period from 2004 through 2007, during which between 192 and 216 companies went public each year.
A driving force behind the string of IPOs, including today’s $470 million offering by LPL Investment Holdings Inc., comes down market performance and investor appetite.
The recent shift by investors toward more equity exposure has helped drive the equity markets and in turn has created an ideal time for new offerings, according to Peter Kies, co-director of equity capital markets at Robert W. Baird & Co. Inc., a midmarket investment bank.
“Wall Street will create supply when there’s demand,” he said. “A year ago, money managers had to sell something to buy a new offering, but the amount of money that has recently started moving into equity funds has had a positive impact on the IPO market.”
In addition to GM and LPL, government consulting firm Booz Allen Hamilton Inc. raised $238 million with its IPO on Tuesday.
JWC Acquisition Corp., a newly organized company formed to effect mergers-and-acquisitions activity, raised $125 million Wednesday.
There are six other companies expected to go public this week.
“The activity has been driven by a more hopeful feeling about the U.S. economy,” said Bill Buhr, an IPO analyst at Morningstar Inc.
“It seems clear to people that the economy is on a slow uptick now,” he said. “When all the components come together, the IPO window will remain open.”
However, Mr. Buhr warned, despite the rush of new offerings, the individual IPOs come in many different stripes.
“It’s fair to say that GM and LPL represent huge successes, with both pricing at the top end of their target ranges,” he said. “But each deal is its own entity, with its own characteristics.”
For example, two biotechnology companies scheduled to price this week represent the opposite extremes of the large, established and profitable companies.
Anacor Pharmaceuticals Inc. is hoping to raise $80 million as a late-stage biotech firm with no revenue and no approved products.
Zogenix Inc., which is also hoping to raise $80 million, has one approved product.
The S&P 500, which has risen 5.6% from the start of the year, is up 12.4% from the August 30 low point, which is seen as good news for the IPO market.
“The positive fund flows into asset management firms over the past five weeks have been a huge factor in the recent IPO activity,” Mr. Kies said. “These companies will sit in a state of readiness to go public, and when the time is right, they will put the pedal down.”
Another factor, he added, might be taxes, considering that many of the recent IPOs are coming out of private-equity portfolios that are likely to see new tax rules in 2011.
“We’re seeing the private-equity firms get their holdings out there because starting next year, the carried-interest tax rates are going from capital gains to ordinary income levels,” he said.
Of the first four IPOs this week, LPL and Booz Allen both are coming out of private-equity portfolios, and GM is a very rare form of privatization offering from the U.S. government.
These are the kinds of factors that investors should consider once these stocks start trading on the open market, according to Josef Schuster, chief executive of IPOX Schuster LLC.
Mr. Schuster, who manages the Direxion Long/Short Global IPO Fund (DXIIX), said some of the private-equity-backed deals are designed to pay down debt or pay off private-equity firms, which is not the same as an upstart firm’s looking to raise money for growth.
Mr. Schuster separates newly public companies into three main categories for investment purposes.
The first stage is the first week of trading, when newly public companies tend to outperform the market.
The second stage, which is the first year after the IPO, the stocks are still not yet driven by fundamentals and will perform positively based on factors such as institutional demand and inclusion in various indexes.
The third stage, which is the three-year period after the first year of being public, is when the short selling begins.
“A few companies will continue to do very well after the first year,” he said. “But a lot of companies will not meet earnings expectations and will start to underperform.”