A little more IPO outlook for 2007

Aaron Pressman

Oh, the cutting we do to make things fit in a mashed up, dead tree pulp pub. Plenty of nuggets got cut from my 2007 IPO outlook story so I thought I’d share a few more ideas here.

First and foremost, we sort of lost the explanation for why the IPO market has rebounded so nicely (though not 1999-style insanely). Depending on how you measure activity and what you exclude, 2006 looks like it will end up as the best year since 2000. Why? Basically, merger activity is at an all-time record and stock buy-back activity is at an all-time record. Private equity firms and corporate strategic buyers announced $1.4 trillion of deals just in the U.S. while global M&A activity exceeded $3.6 trillion. Stock buybacks also hit a record of $431 billion for the 12 months ended September 30, Standard & Poor's says.

Put those two forces together and you are talking about maybe $2 trillion dollars of once public equity shares being transformed into cash from a shareholder’s perspective. Equity managers can reinvest in any number of ways but certainly it puts IPOs in greater demand. And so after five years when no U.S. IPO over $10 million doubled in its first day of trading, Chipotle Mexican Grill (CMG) and the New York Mercantile Exchange (NMX) did this year, while five more gained at least 50% in a day (legalistic double-talk there excludes Baidu, the Chinese Internet search company that more than doubled on its first day in August 2005). So what else looks good for 2007?

The magazine story mentions financial sector deals and reverse IPOs but less complicated business models drew plenty of action this year, too. Top performers included Crocs (CROX), Chipotle and Bare Escentuals (BARE), retailers and restaurateurs that showed several years of rapid growth in revenue and profits before going public. "Consumer IPOs have done really well," Linda Killian, manager of the IPO Plus Aftermarket Fund told me. "Companies with good stories will continue to do well." Heelys (HLYS) just blew the lights out and I don’t see a ton of similar deals waiting to be priced right now.

I’m intrigued by Vision-Ease Lens, an eye-glass lens maker – how many baby boomers will buy how many pairs of bifocals in the next 20 years? The company isn’t making much money on about $100 million of annual revenue thanks in part to interest expenses (it was bought out of BMC Industries’ bankruptcy proceeding in November 2004). Closer analysis is required, though, as this is basically a reverse buyout deal. Marquee Holdings, which operates movie theaters under the AMC and Loews brands, is also worth a look with again big interest costs likely going down after an IPO.

Energy is also an interesting sector that lost momentum as the year progressed and the price of oil reversed course. Recent limited partnership deals have done poorly and ethanol, well, I don’t have to remind you about those, do I? Aventine Renewable Energy (AVR) lost almost half its value since June and VeraSun Energy (VSE) is down about 5%. Still, there have been recent filings for techy energy plays, perhaps on the hopes that with Congress controlled by Democrats more funding will be forthcoming. For example, Biofuel Energy is an ethanol plant operator, not so hot in my book, while Ocean Power Technologies is start-up looking to produce electricity from ocean wave currents.

The mag story briefly covers the slow but steady return of technology companies going public. Riverbed Technology (RVBD) and Acme Packet (APKT) were among the first communications tech companies to go public since the bust. Riverbed is up over 200% since September and Acme is up almost 100% since October so it’s no surprise that more communications companies have filed. An important point to note is that the bulk of those gains happened after the opening day of trading, meaning that there’s clearly a lot of pent up demand. Similar deals like Opnext and Veraz Networks will be worth a close look in 2007.

Another reason for a greater resurgence of tech deals is the once unlikely interest of LBO firms. Tech companies used to be considered too volatile to handle the big debt load associated with a leveraged buyout but not anymore. Deals to take Freescale Semiconductor and Philips Semiconductor private, for example, put over $20 billion in the hands of tech investors.