IPOs: More Market Mojo in '07

A hot year for public offerings may be wrapping up, but analysts think the market could get even steamier in the next 12 months

by Alex Halperin

For all the fascination they hold for investors, IPOs remain some of the riskiest bets out there. Even when a company looks to have a solid business model and management, there's no sure way to predict how the market will treat a new kid on the equity block. But a December blizzard of debuts has made IPO investors look very smart, and analysts say the sizzling climate for stock offerings could continue well into next year.

As the Dow Jones industrial average traded near all-time highs during the week of Dec. 11, the market continued to show an appetite for new offerings. Eighteen deals went out that week for a grand total of $2.9 billion, according to market research group Dealogic. And after a requisite holiday slowdown, analysts say the good times could continue in 2007, as a strong pipeline of companies and plenty of liquidity could keep the mood jubilant. Through Dec. 15, there were 202 deals registered with the Securities & Exchange Commission in 2006, about the same as in 2005. But this year's were for an average of $220.8 million, up from $183 million in 2005.

"We expect things to continue plugging along through the first quarter," says Jody Drulard, managing director of Dealogic. The deals that are coming out are "exactly how you would want IPOs to be priced," he adds, with a 9% to 10% jump on the first day and advances continuing through the lockup period before company insiders can sell their shares. (The numbers from Dealogic don't include so-called blank-check IPOs, in which a management team goes public to raise money, then decides what kind business the company will enter after the proceeds roll in.)

Eye on Tech

"The backlog is still pretty strong compared to where it's ended the last couple years," Drulard continues. He sees IPOs springing from leveraged buyouts continuing to energize the market. Even so, he cautions that the outlook relies heavily on continuing steady interest rates and other macroeconomic factors. With more highly leveraged buyout deals preceding new stock offerings, he says, "it's arguable that the LBO market is getting near the top."

Paul Bard, vice-president of IPO research outfit Renaissance Capital, says some of the most promising deals could continue to flow from the technology sector, in the mode of successful recent offerings such as Riverbed Technology (RVBD) and Acme Packet (APKT). In this vein, he says investors should watch the upcoming deals from Veraz Networks and Mellanox Technologies, as well as companies that haven't filed for an offering but may, such as Force10 Networks and NetSuite, among others.

Gaining traction amid the ruins of the Internet bubble, these companies "had to grow their business at a time when things weren't so easy," he says. And given the current boom, Bard adds, going public is an attractive play for investors looking to exit small tech outfits.

Bard is also intrigued by the upcoming offering from Fortress Investment. In a deal led by Goldman Sachs (GS), the stock would offer an indirect hedge fund investment, one of the few such opportunities available to American investors.

Early Stages

Even with market watchers still waiting for a better sense of the 2007 IPO picture, a few household names have popped up on the 2007 slate. They include Time Warner Cable and movie theater chain AMC Entertainment. National CineMedia, a producer of pre-movie advertainment owned by AMC and its competitors, has filed as well.