The $30 billion raised from initial public offerings this year marks the lowest amount since 2009. Meanwhile, global mergers and acquisitions volume of over $4.6 trillion broke the 2007 record, according to Dealogic, with U.S. deal volume surpassing $2 trillion for the first time. So what's behind these opposing trends?
First, 2014 was a banner year for IPOs, making for a tough comparison. Even without Alibaba’s (BABA) $22 billion offering last year, 2015 dollar volume still would have declined 53% because of fewer offerings in every sector, particularly in the technology and energy sectors. The decline in private equity-backed LBOs and other large offerings also impacted on overall IPO volume.
Second, overall market volatility -- notably the spike in the fear index we saw at the end of the summer -- made for a less welcome environment for IPOs. Uncertainty about the Federal Reserve and European monetary policies, along with concerns over emerging market economies and macro-economic growth, cast a shadow over markets and contributed to unimpressive IPO returns.
A more price-sensitive market made it less appealing for private companies to debut. While there were a couple of bright spots—Shake Shack (SHAK), GoDaddy (GDDY) and Fitbit (FIT), to name a few—there were more disappointments -- 58% of all IPOs traded below issue and the average IPO was down 4% at year-end, according to Renaissance Capital. A hotly-anticipated IPO, Ferrari (RACE), is currently trading about 10% below its IPO price.
Two sectors were also notably absent from filings this year: Energy companies barely made an appearance, an absence blamed mostly on the falling price in oil. And technology, where private funding remained strong, saw only 23 IPOs raising a mere $4.2 billion, versus $24 billion raised last year, according to Renaissance.
While the IPO market fizzled, 2015 was certainly the year of the mega deal. There were a record high 10 deals over $50 billion, according to Dealogic. Companies have cited low interest rates, available financing and strong balance sheets as some of the drivers behind the M&A wave. But a number of strategists say the merger mania reflects a defensive strategy: At this late point in the economic cycle, companies are going the M&A route because they lack adequate organic growth.
The December announcement of a $130 billion tie-up between Dow Chemical (DOW) and DuPont (DD) capped a strong string of deals that included: the largest healthcare transaction between Pfizer and Allergan for $160 billion; the largest beverage deal between SABMiller and Anheuser Busch Inbev for $117 billion; the largest oil and gas cross-border deal with BG Group and Royal Dutch Shell at $81 billion; the largest telecom deal between Time Warner and Charter Communications at $80 billion; the largest technology deal with EMC and Dell for $66 billion; the largest food deal, Kraft Foods and HJ Heinz at $63 billion; and the largest health insurance merger between Cigna and Anthem at $55 billion.
So what does all this mean for 2016?
Smith says the IPO market next year could prove promising, but that will depend on pricing expectations. The IPO pipeline currently contains 110 companies looking to raise $26 billion, according to Renaissance Capital, whose private company watchlist has grown to 288 companies.
There are three types of companies that will be motivated to go forward with IPOs in 2016, says Smith.
The first group are private-equity-backed leveraged companies. With interest rates rising, these companies are going to be in a hurry to raise equity to refinance variable rate debt and lock in low rates now. The potential issuers will likely follow a story similar to First Data (FDC), which priced 16% below its midpoint of the expected range and has traded flat.
Albertsons, US Foods, Univision and Neiman Marcus are all names on this watchlist.
The second group: Venture-backed tech unicorns that sport valuations of $1 billion or higher. These companies, of which there are more than 100 now, have had the luxury of staying private, aided by high levels of venture capital. In fact, Uber’s latest $2.1 billion round of funding alone almost matches the level of public equity funding for tech companies overall this year. That said, more volatility in the public markets and signs of funding starting to dry up (new rounds are being done at lower valuations) could incentivize many unicorns to get their IPOs out the door. These IPOs are going to follow the Square (SQ) playbook, which priced 25% below its projected range and at a valuation under its last two private rounds.
Smith noted that private valuations have come down. In November, Fidelity Investments wrote down the value of its stake in Snapchat by 25%. And just this month, it was reported that Gilt Groupe is in talks to sell to Hudson’s Bay, the parent company of Saks Fifth Avenue and Lord & Taylor, for $250 million, about a quarter of its one-time private valuation. Some of the most highly valued unicorns are: Uber, Airbnb, Palantir, Snapchat, Pinterest and Dropbox.
The third group includes growth companies with profits, which Smith predicts will be the IPO sweet spot in 2016. These companies will follow the path of Atlassian (TEAM), which set a low valuation range for its IPO at the beginning of December, priced 20% above the midpoint of the expected range, and then traded solidly above its IPO price. Companies in this category will likely include SoulCycle, BATS Global Markets, and Frontier Airlines, Smith says.
As for M&A, the thirst for growth remains, as do high levels of cash on the balance sheets. Even though there is, of course, risk associated with interest rate increases and tightening credit markets, PricewaterhouseCoopers sees megadeal activity likely to continue, particularly amid shareholder activism.