IPOs Wait For Better Conditions To Launch

August 11, 2011

Investors have been understandably jittery this week. So have underwriters.

In what was to have been a busy week, 12 companies were on tap to go public. But with markets around the globe roiling, 10 of them postponed their debuts. The other two limped in Wednesday night at discounts and traded mixed on Thursday.

The previous week, when the heightening debt crises sent the first bruising ripples through the markets, only one of three firms slated to price actually debuted. It, too, has foundered.

And there are few offerings in the pipeline going forward.

"It is no surprise that the IPO calendar gets derailed when equity markets are extremely volatile," said Kathleen Smith at IPO investment advisory firm Renaissance Capital.

IPOs are inherently risky, since the companies don't have long track records to lure investors. Still, investors who got in early on some of this year's hotter IPOs were rewarded with grand first-day pops.

Professional networking site LinkedIn (NYSE:LNKD - News), for instance, leapt 109% on its opening day in May. Online real estate firm Zillow (NASDAQ:Z) jumped 79% in its July debut.

But markets have been falling sharply since last Friday's downgrade of U.S. debt, fears over Europe's own debt problems and concerns about a possible double-dip recession. That's made investors less welcoming to the latest batch of IPOs.

Online data backup firm Carbonite (NASDAQ:CARB) raised $62.5 million Wednesday, pricing at $10, the low end of its already reduced range and 40% less than what it had hoped to raise. Still, that lower price sparked some interest Thursday. Shares closed up 23.5% at 12.35.

Oil and gas company Sand-Ridge Permian Trust (NYSE:PER.V - News) raised $540 million Wednesday, but priced at $18, a dollar below its proposed range. Shares traded lower through the day, but closed flat at 18.

Last week's lone offer, American Capital Mortgage (NASDAQ:MTGE - News), more than halved the number of shares it brought to market. Despite that reduced supply, weak first-day demand pushed shares down 8% from the $20 IPO price. It closed Thursday at 19.69.

"Investors are not so anxious to pay up for companies that may end up becoming hostage to financial situations in the marketplace due to a changing economy," said David Menlow, president of new issue tracker IPO Financial.

Companies say they and their underwriters are waiting for the markets to stabilize before trying again.

Regional bank HomeStreet, which postponed its IPO earlier this week, cited the "significant volatility experienced in the capital markets over the past several days" in an SEC filing announcing the delay.

It's a familiar pattern.

Scott Sweet, senior managing partner at advisory firm IPO Boutique, says he tracked 256 IPOs in 2000, the height of the dot-com boom. With the crash, firms postponed or withdrew offerings. He counted just 96 pricings the following year. In 2007, he tracked 279 firms making it to market, and just 50 in the tumultuous year of 2008.

Under the circumstances, the postponements make sense.

Several firms that postponed this week had first either lowered their price estimates or reduced the number of shares they planned to offer.

One Shot At Glory At the reduced prices necessary to lure investors in, many deals might not raise enough capital to pay off debt, fund expansion or fulfill other strategic targets that prompted the offers in the first place.

And companies only get one shot at being tagged a "successful" or "hot" IPO, Menlow says.

"You don't want to have an IPO that opens into a market that's down 400 points if you don't have to," he said.

And investors who get burned on a poorly timed IPO might not give a warm reception to later secondary offerings, says Sweet.

"Investors have long memories," he said. "They will recall companies that blew up and say, 'I don't like that company. I got hurt by that story.'

Empty Pipeline Next week's calendar looks bare too. Chinese online video firm Tudou is still slated to price. But the falling market, and some recently tarnished Chinese stocks, may derail that one too, analysts say. Tudou's closest public rival in the U.S., Youku.com (NYSE:YOKU - News), is trading near its 52-week low.

Smith says she's not expecting bumps in IPO activity until September at the earliest. And even then, only the strongest companies are likely to do well.

Analysts too are watching for Groupon, the daily-discount pioneer, which could come public as soon as next month.

Online game site Zynga is another highly anticipated offering expected this year.