Opinion by Timothy J. Keating
“Toto, I’ve a feeling we’re not in Kansas any more. We must be over the rainbow!”
If the Tech Bubble of 1999-2000 was the Kansas of the IPO market, then no, Toto, we’re definitely not in Kansas any more. But is where we are today really all that is on the other side of the rainbow? No, and here are a number of important silver linings that provide hope for a more robust and vibrant IPO market—particularly for small issuers.
Priced IPOs. The critics point to a currently difficult IPO market. Yes, it’s true that there were only nine IPOs priced through February of this year. But that is an 800% improvement over the one IPO that was priced in the first two months of 2009. Admittedly, an easy comparison period, but progress nonetheless.
New Filings. Through February, 30 companies filed S-1 registration statements to do an IPO—a 900% improvement over the three that filed in the same period last year. (See chart on page 3.) On February 16th, a total of six companies filed new IPO registration statements—the highest one day total since July 2007.
IPO Withdrawals. Through February, only three companies had withdrawn their IPO registration statements—a 70% improvement over the 10 withdrawals in the same period last year.
Average Deal Size. Now this one is counterintuitive. As of the end of February, the mean market cap for companies trading on Nasdaq was approximately $1.4 billion. Yet the median market cap was $171 million, and a full 69% of all companies on Nasdaq had market caps below $1 billion. Smaller is better, because it means that more new, promising companies are able to come to market. Here are the deal size data: In 2008, the average gross proceeds raised in an IPO was $650 million (skewed by Visa). Without Visa, the average was $240 million. In 2009, the average deal size jumped to $348 million. This year, the average deal size thus far is $158 million. Whether this is a trend that continues remains to be seen, but it is encouraging.
Small IPOs. In 2009, 13 of the 51 priced IPOs (we exclude REITs, funds and reverse mergers from our calculations)—or 25% of all deals—raised gross proceeds of under $100 million. This year, three of the nine priced IPOs—or 33%—have been transactions for under $100 million. Last year only one company raised less than $50 million. Through February, there has already been one sub-$50 million IPO.
Underwriter Hegemony. Last year, the “Final 4 Underwriters” (Goldman Sachs, Morgan Stanley, J.P. Morgan and Bank of America Merrill Lynch) either lead or co-managed an astonishing 80% of all IPOs (40 out of 51). In 2010, this hegemony has given way to a new crop of emerging underwriters such as Rodman & Renshaw, Merriman Curhan Ford and Broadband Capital.
Appetite for Risk. Of the nine IPOs that successfully priced through February, three of the companies were loss making. The mean net income of all priced IPOs was $3 million, while the median net income of the universe was –$2 million. While there have been no pre-revenue companies, the revenue for the three smallest companies was $32 million, $35 million and $74 million. Clearly, there is a re-emerging appetite for risk on the part of equity investors.
To be sure, there is still a litany of challenges standing in the way of a humming, vibrant IPO market including: Sarbanes-Oxley, Regulation FD, the Spitzer “global settlement” on equity research and other critical aftermarket support issues.
Notwithstanding these challenges, both the economy and the financial markets are continuing to recover—in spite of obscene, misguided attempts from Washington to interfere with this otherwise self-correcting process. With zero percent interest rates continuing for as far as the eye can see, and the specter of (hyper?) inflation lingering on the horizon, the prospects for fixed income investments are uninspiring, to say the least. The IPO market seems to be telling us—at least for the moment—that in the absence of more compelling alternatives, risk taking in new equity issuance is beginning to make a comeback.
Of course, continued economic recovery, falling unemployment rates, more robust corporate earnings and an increase in bank lending will all positively influence the overall equity markets, which always tends to be a key barometer for the IPO market. But even in the absence of these, there appears to be a ground swell of interest by institutionally-backed private companies to pursue $100 million or less IPOs. More importantly, an increased appetite is developing among investors to participate in these opportunities for selective technologies and innovative products which have demonstrated high growth potential and a path to profitability.
Perhaps, just maybe, there is at last reason to hope that we may find those silver linings somewhere over the IPO rainbow.
