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Nasdaq IPOs Beaten by S&P 500 for 1st Time on LBO Castoff Sales

For the first time on record, initial public offerings on the Nasdaq Stock Market are lagging behind U.S. equities after more than doubling the Standard & Poor’s 500 Index’s return every year in the past decade.

Anyone who spent an equal amount on shares of Dehaier Medical Systems Ltd. (DHRM), Anthera Pharmaceuticals Inc. (ANTH) and 41 other Nasdaq-listed IPOs this year would have lost 5.2 percent, more than the 3.5 percent drop in the S&P 500 during the same period, data compiled by Bloomberg show. From 1999 to 2009, initial offerings by Nasdaq companies from Google Inc. (GOOG) to Priceline.com Inc. (PCLN) beat the benchmark index for American equity by 42 percentage points a year on average, the data show.

Newly listed Nasdaq companies aren’t growing fast enough to justify higher valuations, according to Tim Loughran, a finance professor at Notre Dame’s Mendoza College of Business in Notre Dame, Indiana. Sales will increase 20 percent as fast as the historic average for Nasdaq IPOs, analysts’ estimates compiled by Bloomberg show. All of the companies taken public by leveraged buyout firms this year have fallen on even smaller projected revenue gains.

“I’m trying to buy the next Google when I invest in an IPO,” said Loughran. Nasdaq IPOs are supposed to be “young companies with a lot of potential. If we went back in time and talked about the most cutting-edge companies we would talk about all these young companies, but they’re not there now,” he said.

Photographer: Adam Dean/Bloomberg

A Google Inc. logo is lit outside its office in Beijing, on Jan. 13, 2010. Close

A Google Inc. logo is lit outside its office in Beijing, on Jan. 13, 2010.

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Photographer: Adam Dean/Bloomberg

A Google Inc. logo is lit outside its office in Beijing, on Jan. 13, 2010.

Annual Gains

IPOs of companies on the Nasdaq Stock Market climbed in nine of the past 10 years, outperforming both the S&P 500 (SPX) and the Nasdaq Composite Index (CCMP), according to data compiled by Bloomberg. The only time before this year that new Nasdaq shares declined was in 2008, when they fell 13 percent on average. The S&P 500 and the Nasdaq Composite both slid 30 percent in the same period, the data show.

Nasdaq IPOs gained each year in the 2000 to 2002 bear market as technology stocks plummeted. They advanced an average 0.3 percent in 2000, beating the S&P 500 by 8.8 percentage points, data compiled by Bloomberg show. Investors in the Nasdaq Composite would have lost 36 percent.

So far this year, 32 of 43 Nasdaq offerings have fallen, according to data compiled by Bloomberg. The declines contrast with an average rise of 1.5 percent for initial sales on the New York Stock Exchange.

Mitel Networks Corp. (MITL) of Ottawa, which sells software that lets businesses make telephone calls over the Internet, and Anthera, the Hayward, California-based developer of drugs for cardiovascular diseases and lupus, have lost more than 47 percent since their IPOs for the biggest slumps.

X-Rays, Replacement Organs

Dehaier Medical, the Beijing-based maker of X-ray machines, sleep apnea treatments and breathing devices, and Tengion Inc. (TNGN), the East Norriton, Pennsylvania-based company trying to grow replacement organs, have dropped more than 39 percent.

Sales for companies that debuted on the Nasdaq this year will climb 27 percent in 2011, according to analysts’ estimates compiled by Bloomberg. Revenue from Nasdaq companies in the past decade has jumped by an average of 125 percent in the year after their IPOs.

Google, the Mountain View, California-based owner of the world’s most popular search engine; Priceline.com of Norwalk Connecticut, the second-largest online travel company; and Beijing-based Baidu Inc. (BIDU), which operates China’s biggest search engine, increased sales by at least 92 percent in the first year after completing their IPOs, data compiled by Bloomberg show.

No Profits

Mitel’s revenue may rise 7.2 percent next year, according to analyst estimates, while neither Anthera nor Tengion had sales or profits at the time of their IPOs, filings with the U.S. Securities and Exchange Commission showed.

This year’s six Nasdaq IPOs backed by private equity firms -- which typically use borrowed money to take controlling stakes in companies -- will report average revenue growth of 11 percent, analyst estimates compiled by Bloomberg show. That’s 61 percent less than the average for all IPOs.

Buying their shares would have resulted in a loss of 24 percent this year, versus 2.1 percent from IPOs of companies that weren’t backed by LBO firms.

NXP Semiconductors NV (NXPI), the largest Nasdaq IPO this year, may increase sales 3.9 percent in 2011, an estimate by London-based Independent International Investment Research Plc showed.

The chipmaker, acquired by New York-based KKR & Co. (KKR), Bain Capital LLC of Boston and three other private equity firms at the height of the credit-market bubble in 2006, has slid 14 percent since its IPO last month. The S&P 500 declined 3 percent in the same period, Bloomberg data show.

NXP, KKR

NXP dropped more than 18 of the 20 publicly traded companies that it listed in its regulatory filing as competitors, data compiled by Bloomberg show.

KKR, the firm founded by billionaire investors Henry Kravis and George Roberts, said last month that its stake in the Eindhoven, Netherlands-based maker of semiconductors used in everything from radars to pachinko machines was now worth 50 cents on the dollar.

“We had a lot of innovative new companies coming out in the past which needed financing to grow the next market share and to grow themselves,” said Tim Hartzell, who oversees $300 million as chief investment officer for Houston-based Sequent Asset Management. Now, “a lot of this is just stuff from the private equity bubble that’s getting purged out from private equity firms,” he said.

Slower Economic Recovery

New Nasdaq companies have also fallen as concern the economic recovery is deteriorating sent stocks lower.

While the S&P 500 posted its biggest August drop since 2001 as the Federal Reserve said the economic rebound was weaker than it had anticipated, rallies by companies from Primerica Inc. (PRI) to JinkoSolar (JKS) Holding Co. have helped NYSE IPOs advance this year.

Primerica, the Duluth, Georgia-based insurance business that Sanford I. “Sandy” Weill used to build Citigroup Inc., has gained 42 percent since its initial offering in March. The S&P 500 retreated 6.6 percent in the same period.

The distributor of consumer-finance products from term-life insurance to mutual funds is valued at 9.53 times estimated earnings for the next year, compared with 11.4 times for the S&P 500, data compiled by Bloomberg show.

JinkoSolar, the maker of silicon wafers and solar cells based in China’s Jiangxi Province, surged 162 percent since its May IPO as the S&P 500 fell 5.7 percent. The company trades at 7.86 times next year’s profit, data compiled by Bloomberg show.

‘Degree of Optimism’

NYSE-listed IPOs are 32 percent cheaper than those on the Nasdaq, which are valued at an average of 21.9 times 2011 earnings, according to data compiled by Bloomberg.

“You have to have a certain degree of optimism and hopefulness to invest in a Nasdaq IPO, just because of the promise of the future and the growth that lies ahead,” said Jack Ablin, chief investment officer at Chicago-based Harris Private Bank, which oversees $55 billion. “With the level of uncertainty on the economic horizon, it’s certainly going to impact prospects for investors to embrace Nasdaq IPOs.”

To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.

To contact the editor responsible for this story: Daniel Hauck at dhauck1@bloomberg.net.

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