IPOs: On the Comeback Trail

The pace of offerings is picking up, with financial and health-care issues leading the way. But the market still lags its 1999-2000 glory days

by Palash R. Ghosh From Standard & Poor's Equity Research

The pace of new listings on U.S. exchanges has accelerated to its fastest rate since the hectic days of 1999 and 2000. This year through Apr. 17, there were 55 initial public offerings on U.S. exchanges, an 8% gain from the year-earlier period, according to Renaissance Capital, an investment adviser specializing in IPOs. Seventy-eight IPOs have been filed with regulators so far this year, a 13% rise.

However, the IPO business has a long way to go before it can match the frenetic pace of the boom years of 1999-2000. Linda Killian, portfolio manager of the IPO Plus Aftermarket fund (IPOSX), points out IPOs are in a slow recovery from the depths of the 2001-2003 bear market.

In 2006, there were 198 IPOs in the U.S., amassing proceeds of about $43 billion. There were 194 IPOs in the prior year, raising $34 billion. While these numbers are increasing, they pale in comparison with the halcyon days at the cusp of the 21st century; 486 IPOs hit the market in 1999, generating $93 billion in proceeds, followed by 406 offerings in 2000, garnering $97 billion.

Radically Different

Then, as the market crashed, so did the IPO business. From 2001 through 2003, the number of IPOs issued declined to 68 from 83. Proceeds fell to a paltry $15 billion from $41 billion.

Killian thinks it will take several years for the IPO market to return to a normal rate of annual issuance. "I think that an average year for IPOs is 250 deals, so we're still below that," she says. "We can return to a healthy IPO market when investors feel they will be rewarded for buying new companies." Killian notes that in 2006, IPOs fell into two divergent camps: growth and yield. She says the traditional IPO growth sectors of technology and health care were more active than in 2005.

The average IPO returned 26% last year. IPO proceeds in 2006 were inflated by seven deals valued in excess of $1 billion. MasterCard (MA) ranked at the top in terms of volume ($2.4 billion).

The IPO business is radically different now from the speculative period of 1999-2000. For example, the average first-day return for IPOs amounted to an astounding 72% in 1999 and 56% in 2000. By 2006, that figure came down to 11%. Another dramatic difference: In 1999 and 2000, the majority of companies going public were unprofitable. In 2006, about 75% of the companies were profitable.

Tech Crush

The IPO world of 1999-2000 was filled with dozens of dot-coms and human-genome companies, most of which have since vanished. Over the past 12 months, financials have accounted for the most IPOs (18.8%), followed by health care (17.8%), energy (16.3%), and technology (15.8%).

"The fact that financial-services companies accounted for nearly 19% of IPO activity in the past 12 months isn't a surprise, considering that this sector accounts for more than 20% of the total market," says Cathy Seifert, head of financial institutions equity research at S&P. Seifert notes that recent IPO activity included a number of large deals. In the future, the deal composition might be smaller, on average, she says.

Technology generally represents from 16% to 20% of all IPOs, Killian says. In the mid-1990s, technology represented as much as 40% to 50% of the IPO market. "These things go in cycles," she notes. "It all depends on underlying demand and technological innovation. What's happening now is that tech IPOs—after being in the doghouse with investors for several years—are returning to favor." On average, tech IPOs gained 37% in 2006.