By Susan Kitchens, Forbes, March 29, 2004
Here come the IPOs again.
After a three-year drought, initial public offerings are creeping back into the market. Through the middle of March, 33 companies listed their shares on major U.S. exchanges, up from only five companies over the same period in 2003.
Last year, the market saw only 83 new listings raising $16 billion–the slowest full year for IPOs since the 1970s, according to Thomson Financial.
Then IPO volume began picking up last summer, as the markets signaled a renewed interest in equities. The Nasdaq Composite jumped 50% in 2003, while the S&P 500 stock index climbed 26%. Capital inflows to mutual funds topped $80 billion, putting fund managers on the lookout for new investments–and, ultimately, new companies in which to invest. Tack that on to the encouraging 4% economic growth in last year’s fourth quarter, and you’ve got a good environment for funding new companies.
But don’t look for a repeat of the late-’90s frenzy. In 1999 alone, for example, 486 companies went public. Marshall Sonenshine, managing partner of Sonenshine Pastor, a New York investment banking advisory firm, says we’re currently in an IPO “renaissance,” not a boom.
Sonenshine says the current IPO calendar is more diverse–both in terms of sector and geographical representation–and listing companies are of higher quality today than they were five years ago. Yet the deals are also smaller: This year, only two have topped the $1 billion mark. The year’s largest IPO so far–Shanghai-based Semiconductor Manufacturing International (nyse:SMI)–raised $1.8 billion on March 11 but is down 15.5% since its listing on March 17. In second place is Assurant (nyse: AIZ – news – people ): The insurance company and Fortis spinoff was worth $1.76 billion; it is up 8.2% since its Feb. 4 listing.
Many market watchers agree: Forget the frenzy that was. Don’t expect the free-for-all craze that ushered in the last IPO boom. Even so, some of the most anticipated offerings this year are online businesses, such as retail site Shopping.com, electronic stock exchange Archipelago and jewelry seller Blue Nile. One Internet-only commercial bank, The Bancorp Bank (nasdaq:TBBK), is up 41% from its $12.50 offering price.
“In the late ’90s, there was a mania,” says Tom Taulli, a finance professor at The University of Southern California. “That’s not the case today. Some people are skeptical. During the boom time, a lot of companies that went public shouldn’t have.”
One example is Pets.com, the online pet-products outfit that raised more than $100 million–then went bankrupt only a year after listing. TheGlobe.com was another hall-of-shamer. Developed in a Cornell undergraduate dorm room by a couple of twenty-somethings, the online chat board was sold to investors as a “concept play,” or on the expectation that there would be a market for it. Revenue and profits never materialized.
“The quality bar for companies that listed in the boom days was dramatically lowered,” says Elizabeth Demers, assistant professor of accounting at the Simon School of Business at the University of Rochester.
This time around, expect to see maturer companies filing for public listings. During the boom, one-quarter of companies that went public made money; today 75% are profitable. On average, says Quinten Stevens, co-head of equity capital markets at J.P. Morgan Chase, companies listing today have 18 years of operating history, versus five years in 2000. “There has been a dramatic improvement in terms of the maturity and quality of companies that are being brought to market,” he says.
Listings are more diverse, too. At one point during the boom, technology stocks accounted for 60% of IPOs, according to Linda Killian of Renaissance Capital, a Greenwich, Conn.-based IPO research firm. That’s not the case today. So far this year, technology represents only 29% of the companies that have listed; health care, with 32%, is the most common sector to list. There’s also a good mix of energy, financial services and communications companies.
For those who thought the crackdown on investment banking research and IPO practices would bring about major changes, think again. The top global issuing banks are still Goldman Sachs (nyse: GS – news – people ), Credit Suisse First Boston, Morgan Stanley (nyse: MWD – news – people ) and Merrill Lynch (nyse: MER – news – people ). Citigroup (nyse: C – news – people ) dropped out of the top five last year, according to Thomson Financial, deferring to Arlington, Va.-based Friedman Billings Ramsey (nyse: FBR – news – people ), which was strong in real estate- and financial-related offerings. But the world’s biggest bank by assets will likely rejoin the upper echelon in 2004.
And, unlike many other financial services, IPO fees have hardly come down. Groundbreaking offering techniques, such as the OpenIPO auction-process at San Francisco’s W.R. Hambrecht, haven’t made much movement either.
“I think that we’re seeing a comeback in the IPO market that is consistent and meaningful,” says Linda Killian of Renaissance Capital. But, she adds, there is more skepticism today. “With the exception of a handful of the deals, investors have been very careful with what they are willing to buy, and at what prices they are willing to buy them.”