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IPO market chugging along despite upheaval

Aaron Pressman
The Exchange
Wayne Goldberg, (C) La Quinta's President and CEO, celebrates the IPO of his hotel chain, La Quinta Holdings, on the floor of the New York Stock Exchange April 9, 2014. Shares of Blackstone-backed hotel chain La Quinta Holdings Inc made a subdued market debut as investors took the view that the stock was fully priced in a crowded IPO market. REUTERS/Brendan McDermid (UNITED STATES - Tags: BUSINESS)

Warning signs are flashing for the new-issues market, as almost one-third of deals priced in the past month have sunk below their IPO price amid a general rout of high-growth/no-profit stocks.

But, in what could end up as the busiest week for IPOs in more than six years, most of the higher-profile deals are still holding up, leaving the opportunity to go public open for more action. These warning signs at least so far do not indicate a broken market but it's also hardly the gangbusters euphoria that characterizes a bubble.

One of the deal's struggling to stay above water is Ally Financial (ALLY), the former finance arm of General Motors (GM), which priced at $25 a share on Wednesday night and traded down almost 2% on Thursday. The deal raised $2.4 billion, the most of any IPO is 2014. But the company is hardly a typical debut, with the U.S. government involvement, the taint of the subprime melt down and other unique factors.

Tuesday’s $650 million debut for La Quinta Holdings (LQ), a return to the public markets for the 2006 leveraged buyout, finished its first day of trading just 12 cents over its $17 IPO price. Underwriters were conservative, pricing the deal slightly below the company's expected $18 to $21 range. Last week’s $1.3 billion deal for IMS Health (IMS), another reverse LBO, has held up fine and risen 19% from its IPO price.


With tech stocks back on the upswing over the past two days after taking quite a pummeling, that leaves the IPO window still open for most issuers. Among the most prominent are Chinese Internet commerce giant Alibaba, partly owned by Yahoo (YHOO), storage service Dropbox and Travelocity owner Sabre. Even sooner, cloud benefits provider Paycom Software and Mediterranean chain Zoe’s Kitchen are planning to come to market Thursday evening.

Only a few deals have been postponed or withdrawn despite the sharp drop in leading tech names including Facebook (FB), Twitter (TWTR) and Netflix (NFLX). Globoforce Group, which provides HR services online, was the only tech company among six deals withdrawn in the past month, according to research company Ipreo.

No evidence of irrational bubble

There is still virtually no evidence of an irrational bubble overtaking the IPO market. Castlight Health (CSLT) was insanely overpriced, but just one tiny deal. And, yes, the average first-day gain for new issues, at 18%, is the highest since 2000, according to Dealogic. But in 2000, the average gain was more than 57%. This year’s average is barely higher than the 2013 figure of 16.8% and in the same range as returns on IPOs from 1995 through 1998. It was 1999, the year before the bubble popped, when average gains hit truly nutty levels, at 67%.

You can additionally point to the more than 70% of IPO companies that have not shown a profit over the past year, also a post-Internet bubble high. But as Dan Miller-Smith, CEO of Syndicate Pro, explains, that high level is almost entirely due to the market’s desire for startup biotech firms, which never have profits when they go public. Of the 82 companies that have gone public in 2014 so far, 35 were such biotechs, he says.

“If you look at the full picture, there really has not been that much issuance in the technology space,” Miller-Smith says. “It’s really biotech that has skewed many of the stats.”

Similarly, the busted IPOs from the past month have been concentrated among smaller, upstart tech and biotechs  – although Candy Crush owner King Digital Entertainment (KING), which brought in $42 billion last year, sits 17% below its IPO price as well.

Cloud-related companies A10 Networks (ATEN) and Borderfree (BRDR) have both broken their IPO prices in the rout, along with 2U (TWOU), which provides online education services. Possibly even more speculative, biotech deals including Dipexium (DPRX), Ignyta (RXDX) and Galmed (GLMD) have also busted through their offering prices. And a few others, such as Aerohive Networks (HIVE), a wifi networking specialist, sit just a few cents above their IPO price.

Overall, 12 of the 37 companies that went public over the past month were below their offering prices at the close on Wednesday. Include Ally and it's 13 out of 38. So-called busted IPOs tend to trade down further over the next year. Eventually, some will provide fodder for value investors looking for bargains.

Pressman owns shares of King Digital Entertainment in a retirement account.