Markets & Finance

IPOs Keep Rolling On


It was not the most auspicious way to make a public debut. Verigy (VRGY), a producer of test systems for the semiconductor industry, estimated the price of its IPO at $16 to $18 in a June 12 SEC filing. But when the offering went out the next day, the price was lowered to $15 for the Agilent Technologies (A) spin-off.

The markdown meant notably lower offering proceeds for a company only selling 8.5 million shares. And if that wasn't enough, Singapore-based Verigy slipped 5% on its first day of trading, as the overall equity market continued its June swoon.

Indeed, with the Dow Jones industrial average closing at 10,706 on June 13 -- down about 1,000 points from its May 10 high of 11,709 -- and investors still worried about inflation and interest rate hikes , it's not all that surprising to see some lackluster IPO performances. The most noteworthy example is Vonage (VG), which closed at $10.96 on June 13, sharply lower than its May debut at $17 (see BusinessWeek.com, 5/31/06, "Trouble on the Line for Vonage?"). To a lesser extent, launches by non-tech names, such as Burger King (BKC), have also struggled.

POSITIVE DATA. With such global equity market weakness, it hasn't generally been a great time to buy stocks, whether they're long-established corporate titans or Wall Street newcomers. But even so, investors might not want to become too bearish on IPOs based solely on the last few weeks — especially since these deals typically feature a high potential for volatility.

IPO market supporters can point to some positive data amid the gloom. Through June 13, there were 81 offerings in the U.S. in 2006, up from 70 in the same time period in 2005, according to Thomson Financial. And the 2006 deals have raised a total of $17.9 billion, up from $15.2 billion in 2005. Compared with the beginning of 2005, the average price per deal has even increased slightly, from $216.6 million to 221.6 million.

Thomson senior researcher Richard Peterson says there's "not a perfect correlation" between stock-market performance and those of IPOs. Of course, there's a strong impulse for companies and their bankers to come to market when indexes are climbing, but Peterson says that while the current market slide "may cause some concern…I think overall, deals are getting done," especially in the energy sector. Like last year, Peterson sees the number of IPOs topping 200 in 2006. That would be more than twice the total in 2003, according to data from Hoover's.

TIME LAG. And there have been some strong individual showings among the current crop. MasterCard (MA), another big-name debut, priced below expectations at $39 on May 25. But the stock surged $7 on its opening day, making it a bargain for those who got in at the offering price. And the stock has held onto gains so far, closing at $45.50 on June 13.

Companies are still filing to go public at a strong clip. "There's a lag there," says Doug Lovett, an analyst with research outfit Morningstar, noting that many filers initiated the process when the Dow was booming. Lovett points out that this year there has been a surprising number of biotech companies pricing. "They're some of the most risky stocks out there, but if they come out with something, they can do extremely well."

Still, don't look to individual sectors for guidance. The restaurant group, for example, has proven to be a mixed bag. Chipotle Mexican Grill (CMG) soared 100% on its first trading day, to close at $44. And it's up another $12.15 since then, while the Canadian doughnut chain Tim Hortons has also performed respectably. But on the flipside, there has been the subpar performance by Burger King. Another discouraging sign: The much smaller brewery restaurant chain Gordon Biersch on June 13 lowered the estimated price range for its upcoming offering to $10 to $12, from $11 to $13.

SUMMER DOLDRUM? Jamie Brown, head of U.S. investment banking with Canaccord Adams, says that despite the difficult climate, there could still be some hot areas out there, such as health care and green technology.

Even in boom years, summer is regarded as a lull for pricings. This year's turmoil could exaggerate the seasonal fall-off. "The old adage 'Sell in May and go away' has been somewhat compounded" by current market conditions, says Brown, which may keep investors on the sidelines in the warmer months. But with some encouraging examples to spur investor hopes, individual IPOs may prove surprisingly resilient despite the broader market's struggles.


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