The IPO window is suddenly very crowded. But for many companies, especially those looking to the public markets for refinancing, it may be now or never. And with the markets more volatile, timinig is critical for a successful offering.
On November 17, a day on which the Dow Jones Industrial Average dropped 134 points, or 1.1 percent, Delphi Automotive — a company that filed for Chapter 11 bankruptcy protection in 2005 — still managed to raise $530 million at a valuation of $8.5 billion. “We had a narrow window, and we took advantage of it,” Delphi CEO Rodney O’Neal told journalists on November 18.
As many as 200 companies expecting to raise more than $25 billion have filed to go public by the end of 2011, says Trent Tillman, founder of Syndicate Trader LLC, a provider of IPO and secondary-market research. While some are digital media companies riding the coattails of recently successful IPOs such as those of LinkedIn and Groupon, many are older industrial companies that need new capital, such as Spirit Finance, Enduro Royalty Trust and LRR Energy
“We have seen the market absorb 14 IPOs following a two-month shutdown ending in mid-October, with the best-performing IPOs being technology IPOs,” says Kathleen Smith, co-founder of Renaissance Capital, a Greenwich, Connecticut, investment research firm that specializes in IPOs.
The most prominent tech outfit that has lately filed to go public is Yelp, a seven-year-old, Indianapolis-based company with a large database of user-generated reviews of local businesses like restaurants and hair salons. It helps that Groupon and Angies’s List also help customers discover vendors through the web and mobile applications. Groupon rose 31 percent on its first day of trading; Angie’s List was up 39 percent. Imperva ended its first trading day at $24, a 33 percent gain.
Some nontechnology businesses also are being received favorably. Mattress Firm Holding Corp., a Houston retailer of bedding, raised $109 million in a 5.56 million-share offering. It priced at $19 on November 17 and ended its first trading day on November 18 at $22. California-based Network equipment maker Ubiquiti Networks rose 10 percent after selling 7 million shares at $15. It had initially planned to sell its shares at $20 to $22 a share.
“A fair amount of deals are being sold on the hype,” notes Trent Tillman of Syndicate Trader Often it’s the name that’s selling the IPO, not the fundamentals of the business, he says. Many fund managers will buy these high profile IPOs because they don’t want to be seen as left out especially if the offering succeeds, explains Tillman.
Some buyout funds see the current market window as one way of refinancing the debt in their investment portfolios, says Robert Raucci, founding partner of Newlight Management, a New York firm that invests in small-cap and emerging growth companies. And for many of these funds the ability to take some of the capital out of their investments means they can distribute some of it to their limited partners.
In 2007, real estate investment company Spirit Finance was acquired by Macquarie Group, Iceland’s Kaupthing Bank and other independent equity participants, for about $3.5 billion, including some $1.9 billion of debt. Last year, Spirit’s owners put it up for sale for $3.5 billion. But Spirit, which in 2010 had assets of $3.61 billion and liabilities of $2.8 billion had few takers. Now Spirit’s backers have filed to sell $500 million of shares to help restructure the mounting debt.
The market has been underperforming this month, hurt again by fallout from the European sovereign debt crisis, notes Renaissance Capital’s Smith. The FTSE Renaissance IPO Index declined 2.9 percent through November 23, versus a decline of 1.3 percent for the Standard & Poor’s 500 Index. “There will be challenges for those IPOs that still hope to price before year-end,” Smith says. Two companies, Bluestem Brands, a catalogue company owned by Fingerhut, and Lashou Group, China’s largest daily deals group, have already postponed their IPOs, uncomfortable with the projected offering prices.
Against a backdrop of volatile global markets, especially the problems in Europe, IPO buyers are subjecting these firms to a revenue “stress test” - examining them for their exposure abroad, says Karthik Balakrishnan of Globescape Capital, a Washington DC global research firm. Delphi Automotive, for example, planned to sell 24 million shares between $22 and $24. But against a backdrop of European economic turmoil, the former auto-parts unit of GM’s extensive European exposure came under examination, notes Balakrishnan. Delphi generates more than a third of its revenue from European sales. Delphi had to settle for a price at the lower end of the offering.
The problems in the European markets, especially the fixed income markets, has brought new attention to US equities. And companies waiting to go public have been quick to take advantage. But whether the rush of filings will result in successful financings is still up in the air, says Newlight’s Raucci. “Many might have to settle for much less than they originally intended.”