IPOs Hop Back to Life


By Michael Wallace Investors who fund business startups have kept a tight grip on their checkbooks over the past couple of years. After peaking in the first quarter of 2000, the flow of venture-capital funding turned into a trickle. And with the favored means for VC investors to cash out -- initial public offerings of stock and M&A deals -- sealed off by stock market declines, this source of funding all but disappeared, particularly for new technology ventures.

Now things may be turning up at last. There are signs that funding for startups and existing projects is swelling again, after lagging the rebound in the equity market. And that may just herald the long-awaited rebound in business capital spending (see BW Online, 7/18/03, "Is the Ice Thawing in Capital Markets?").

This is not to suggest that VC funding will ever recover to the levels seen during the peak of exuberance at the end of the '90s. But signs of a rebound in VC funding would substantiate our view at MMS International that business and capital spending is finally starting to come back to life.

GOOD SIGNS. According to the PWC/Thompson/NVCA MoneyTree survey, a leading gauge of VC activity, the high-water mark for VC investment in 2000 was $17.2 billion. Things went steadily downhill from there. For two straight years, the survey revealed quarter-over-quarter declines in the amount VCs would plunk down on startups.

The same survey recently showed that the steady decline was finally arrested in the second quarter of 2003. Looking at the specifics, investment posted a slight gain to $4.3 billion, from $4.0 billion in the preceding quarter. The number of companies obtaining funding rose to 669, from 647, with "early-stage" companies garnering funding of $956 million, vs. $668 million -- the first such increase in three years.

It's also noteworthy that interest in IPOs may be perking up again. In its weekly survey of initial public offerings on IPOHome.com, research firm Renaissance Capital sees several signs that "a full recovery in the IPO market is taking shape." Among them, filings and pricing activity has picked up, attendance at interest-generating "road shows" is up, deals that had been put in mothballs are being revived, and aftermarket reception is strong.

CHIP BOOM. Other good signs for the new-issue market: As of Aug. 11, IPO returns are up 36% so far this year, vs. 27% for the Nasdaq composite index. Meanwhile, 94% of IPOs over the past year are trading above their initial offer prices. Though only 18 IPOs have priced in 2003, about a quarter of those were brought to market in August alone.

There are a couple of additional indications that the tech sector's pulse is beating harder. Global chip sales edged up to $12.54 billion in June from $12.49 billion in May, according to the Semiconductor Industry Association (SIA). Sales also gained 10.4% compared to the second quarter of 2002.

The SIA report indicated that a revival of the computation market and persistent gains in the consumer segment helped boost chip industry capacity use to 96% -- and trim excess inventory to "negligible levels." The stock market has taken note, as witnessed by the resilience of the Philadelphia Semiconductor (SOX) index, which has remained above its key moving averages.

IS SPENDING NEXT? What do these tech-specific trends tell us about the broader U.S. economic picture? Where there's IPO smoke, there's usually a fire building in business capital spending. With recent rises in mortgage rates to their highest level in almost a year -- and a recent drop of 16% in the recent MBA mortgage index -- a potential recovery in the business sector couldn't come at a better time for anxious policymakers. (To be sure, rates, even after the recent surge, remain near historically low levels, so there appears to be enough built-up momentum could keep housing and related spending chugging along for a while yet, as evidenced by the stronger-than-expected report on July housing starts on Aug. 19.)

Other developments are also setting the stage for a revival in business spending. We expect after-tax profit growth for companies to rise further to the 10% to 20% range over the next two years. The extreme low level of inventories -- the inventory/sales ratio is hovering just above its all-time low of 1.37 -- in combination with firmer July retail sales, suggests that business may have to squeeze more productivity from existing workforces, or finally start hiring again to meet demand ahead. And when corporate-finance types once again sign off on capital purchases -- and new jobs -- both Washington and Main Street can start breathing easier. Wallace is a senior market strategist for MMS International


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