The IPO market is getting its groove back, with a string of big offerings last week — likely the strongest showing since March 2008.
The $15.8 billion offering by General Motors Co. last Wednesday represents the biggest initial public offering since Visa Inc.'s $17.8 billion IPO 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.
STRONG FINISH SEEN
Ms. Killian said that the IPO pipeline suggests a strong finish for the year, which has already seen 128 IPOs, double the number 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, when between 192 and 216 companies went public each year.
The driving forces behind the string of IPOs, including Wednesday's $470 million offering by LPL Investment Holdings Inc., were market performance and investor appetite.
The recent shift by investors toward more equity exposure has helped drive the stock market 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, 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.
Six other companies were expected to go public last 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.”
Mr. Buhr warned, however, that 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 firms set to price this week represent the opposite extreme because they lack the pedigree of 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 its Aug. 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 last week, LPL and Booz Allen both came out of private-equity portfolios, and GM is a very rare form of privatization offering from the U.S. government.
These are 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.
THREE STAGES
Mr. Schuster separates the evolution of newly public companies into three main time frames for investment purposes.
The first stage is the first week of trading, when newly public companies tend to outperform the market.
In 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.”
E-mail Jeff Benjamin at [email protected].
