Markets & Finance

IPOs Get a Case of Stage Fright


As political tensions, higher interest rates, and surging oil prices have rattled stock markets around the world in recent weeks, companies have grown wary of going public. At the same time, investors, willing in recent years to make aggressive bets on speculative deals and emerging markets, are growing more cautious. Is it the summer doldrums, or is the market for initial public offerings slowing down?

So far in July at least five IPOs have been withdrawn or postponed, according to Thomson Financial, following a flurry of delayed or canceled deals at the end of June. In the first five months of the year, the average number of IPOs pulled or pushed back each month was about three. Richard Peterson, senior researcher at Thomson Financial, says there could be more IPO withdrawals later this month, though there are relatively few pending offerings.

The companies that have withdrawn or delayed their IPO plans over the past month—at least 10, according to Thomson—come from a wide swath of industries. They include the brewery and restaurant chain Gordon Biersch, development-stage drug company QuatRx Pharmaceuticals, and Hexion Specialty Chemicals, which chalked up almost $4.5 billion in 2005 sales.

FORGETTABLE BLIP? The companies that have had strong public offerings in these tumultuous markets often don’t look like the typical startup. They tend to have longer track records and stronger financials. The clothing chain J. Crew (JCG) priced at $20 a share, above its expected range, and then surged 28% in its first day of trading, June 28. Mastercard, the giant credit-card company, went public at the end of May and saw its shares rise 18% on the first day of trading.

The current shakiness might ultimately be a forgettable blip. The 47 deals that went out in the second quarter raised $10.3 billion, more money than any second quarter since 2001, according to IPOHome.com.

Since IPOs are considered risky investments, they tend to fall off during shaky markets when investors grow more careful. There also may be something of a seasonal slowdown. "We’re in the dog days of summer," when the IPO market tends to be slow, says Terrence Schallich, a managing director at the investment bank Pacific Crest Securities. Despite the current "rough patch," he thinks September will be a better time to evaluate market fundamentals.

SETTLING FOR LESS. One withdrawal had a positive spin: On July 5, broadband service provider Clearwire withdrew its IPO and announced a $900 million private investment with participation from Intel (INTC) and Motorola (MOT).

Even some of those companies that have completed their offerings have had to settle for less than stellar results. The investment bank Cowen Group (COWN) priced at $16, below its range of $19 to $21, while Allied World Assurance (AWH) priced at $34, the low end of its range. Valero GP (VEH), which remains majority owned by refining giant Valero Energy (VLO), also priced at the low end of its range. Even so, all three stocks traded flat.

In these conditions, what does a company need to make it out the door? Paul Bard, an analyst with IPOHome.com says they should be profitable with revenues of $50 million, or preferably $100 million. There’s some variance by sector as well. Bard predicts a particularly tough struggle for tech companies. For them, it will "take a unique company that has pretty solid fundamentals," he says. Even some of the stronger companies may just want to wait for a more predictable market to snag a higher offering price.

TEPID WELCOME. Soaring energy prices make Bard more optimistic about that sector. Still, it’s not easy money. Since its debut in late June, ethanol group Aventine Renewable Energy (AVR) has fallen almost 25%. The lackluster debut for Valero GP, which holds indirect ownership stakes in oil terminal and pipeline operations, came just as oil was hitting record highs. Upcoming energy offerings include EV Energy Partners and Atlas Pipeline Holdings.

Looking down the deal pipeline, Bard sees a few red flags. He thinks the tepid welcome for Cowen could mean difficulty for Ryan Beck, another investment bank that is smaller and less diversified than many of its competitors. Likewise, the Clearwire withdrawal and disastrous IPO of Internet telephony provider Vonage (VG) could spell trouble for the scheduled offering of InterMetro Communications, a smaller provider of Internet phone service.

Like Schallich of Pacific Crest, Bard is not alarmist about the current conditions. He believes that they will improve for quality companies, as well as for people who want to invest in them. "I don’t see a big risk to IPOs until we see what happens in the fall," he says.


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