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Arm and Instacart could help break Wall Street's IPO losing streak

A blockbuster initial public offering from SoftBank Group’s Arm Holdings is fueling optimism on Wall Street that an IPO logjam could finally break open after a two-year drought.

The one bank that needs that to happen most is in a prime position to benefit: Goldman Sachs (GS).

Goldman is one of several big banks behind Arm’s offering, which is expected to happen next week and be the largest since electric vehicle maker Rivian Automotive (RIVN) went public in November 2021. Arm designs microchips for phones and tablets.

SUQIAN, CHINA - AUGUST 22, 2023 - Illustration Arm, August 22, 2023, Suqian, Jiangsu Province, China. Arm submitted the US IPO application, the 2023 fiscal year net profit narrowed to 524 million US dollars. (Photo by Costfoto/NurPhoto via Getty Images)
Arm, which designs microchips for phones and tablets, is expected to go public next week in the year's biggest IPO. (Costfoto/NurPhoto via Getty Images) (NurPhoto via Getty Images)

Goldman is also behind other expected offerings in the coming weeks that could be among the year's biggest, including grocery delivery service Instacart, marketing automation software firm Klaviyo, and German shoemaker Birkenstock.

JPMorgan Chase (JPM), Citigroup (C), and Morgan Stanley (MS) are also involved as underwriters in one or more of these deals, along with Barclays and Mizuho Financial Group.

'What is the normal?'

The lineup of IPOs is happening just in time for Wall Street, which is suffering from an extended dealmaking slump that followed a boom in 2021.

Clients turned cautious about everything from the direction of interest rates to relations with China to the larger US economy, dampening the optimism needed to go public, buy companies, or take on more debt.

Firms across Wall Street slashed bonuses and staff, announcing cuts of roughly 20,000 jobs since the end of 2022.

"We've had a moment of clarity, where we realize that trees don't grow to the sky," said Donna Hitscherich, a senior lecturer at Columbia Business School and former investment banker. "There is going to be a new normal, but what is the normal?"

Thus far the freeze has failed to thaw in 2023, which has been the worst for IPOs year to date since 2016 as measured by deal volume, according to data provider Dealogic.

This current quarter is no different thus far, although most of the activity during third quarters tends to happen in the final month of September.

There have been 25 IPOs in the current quarter through Sept. 6, valued at $2 billion. That total value is down 69% from IPOs that took place during the same period in the second quarter and 17% from the corresponding period in the first.

'Risk-on sentiment'

No bank is in more need of some good news than Goldman, which is under an extreme microscope in 2023 as CEO David Solomon wrestles with everything from partner unrest to concerns about strategy as he tries to put a consumer banking experiment behind the company.

Its investment banking revenues were down by 20% in the second quarter, which trailed performances at JPMorgan, Morgan Stanley, and Bank of America.

The drop at Goldman was worse than expected and contributed to a 58% pullback in profits across the firm.

Goldman Sachs chairman and CEO David Solomon testifies before the House Financial Services Commitee during a hearing, Wednesday, April 10, 2019, on Capitol Hill in Washington. (AP Photo/Patrick Semansky)
Goldman Sachs CEO David Solomon, in 2019. (Patrick Semansky/AP Photo) (ASSOCIATED PRESS)

Solomon made the argument in July that the worst was over, noting more "risk-on sentiment" that month. Other banks made the same point, predicting "green shoots" ahead.

There was also plenty of caution from some CEOs who warned that it was too early to declare a turnaround. It remains that way inside some big banks.

One equity markets banker at a major investment bank told Yahoo Finance that the IPO market in the US is "still probably not going to get close to historical levels in 2023" even after counting Arm and Instacart.

Another concern, this banker said, is that if Arm "doesn’t trade well people will be pretty concerned and it will have an impact on the broader market."

Jim Cooney, head of Americas equity capital markets for Bank of America (BAC), said there are 10-15 companies that investors and investment banks are expecting to go public between now and the end of the year. Bank of America is one of the banks helping Arm with its IPO.

"If the majority of them price and trade well then the IPO asset class will see a resurgence approaching over the next two to three quarters," Cooney told Yahoo Finance. "A return to normality."

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