IPOs: More Market Mojo in '07
For all the fascination they hold for investors, IPOs remain some of the riskiest bets out there. Even when a company looks to have a solid business model and management, there's no sure way to predict how the market will treat a new kid on the equity block. But a December blizzard of debuts has made IPO investors look very smart, and analysts say the sizzling climate for stock offerings could continue well into next year.
As the Dow Jones industrial average traded near all-time highs during the week of Dec. 11, the market continued to show an appetite for new offerings. Eighteen deals went out that week for a grand total of $2.9 billion, according to market research group Dealogic. And after a requisite holiday slowdown, analysts say the good times could continue in 2007, as a strong pipeline of companies and plenty of liquidity could keep the mood jubilant. Through Dec. 15, there were 202 deals registered with the Securities & Exchange Commission in 2006, about the same as in 2005. But this year's were for an average of $220.8 million, up from $183 million in 2005.
"We expect things to continue plugging along through the first quarter," says Jody Drulard, managing director of Dealogic. The deals that are coming out are "exactly how you would want IPOs to be priced," he adds, with a 9% to 10% jump on the first day and advances continuing through the lockup period before company insiders can sell their shares. (The numbers from Dealogic don't include so-called blank-check IPOs, in which a management team goes public to raise money, then decides what kind business the company will enter after the proceeds roll in.)
Eye on Tech
"The backlog is still pretty strong compared to where it's ended the last couple years," Drulard continues. He sees IPOs springing from leveraged buyouts continuing to energize the market. Even so, he cautions that the outlook relies heavily on continuing steady interest rates and other macroeconomic factors. With more highly leveraged buyout deals preceding new stock offerings, he says, "it's arguable that the LBO market is getting near the top."
Paul Bard, vice-president of IPO research outfit Renaissance Capital, says some of the most promising deals could continue to flow from the technology sector, in the mode of successful recent offerings such as Riverbed Technology (RVBD) and Acme Packet (APKT). In this vein, he says investors should watch the upcoming deals from Veraz Networks and Mellanox Technologies, as well as companies that haven't filed for an offering but may, such as Force10 Networks and NetSuite, among others.
Gaining traction amid the ruins of the Internet bubble, these companies "had to grow their business at a time when things weren't so easy," he says. And given the current boom, Bard adds, going public is an attractive play for investors looking to exit small tech outfits.
Bard is also intrigued by the upcoming offering from Fortress Investment. In a deal led by Goldman Sachs (GS), the stock would offer an indirect hedge fund investment, one of the few such opportunities available to American investors.
Even with market watchers still waiting for a better sense of the 2007 IPO picture, a few household names have popped up on the 2007 slate. They include Time Warner Cable and movie theater chain AMC Entertainment. National CineMedia, a producer of pre-movie advertainment owned by AMC and its competitors, has filed as well.
It's still too early to know whether some of the larger potential deals will go through. Bard says that in the wake of this year's successful offerings from MasterCard (MA) and NYMEX (NMX), 2007 could see big-money offerings from their respective rivals, Visa and the Chicago Board Options Exchange. Visa has announced its intentions to have an IPO as part of a corporate restructuring, while the CBOE's plan to become a shareholder-owned company has fanned long-standing speculation that the company will go public.
Richard Peterson of Thomson Financial is another bull, saying 2007 will see "an increase in the number of deals and number of dollars."
"People gravitate to brand names," he says speculating that 2007 could see deals for marquee retailers like Toys 'R' Us, and Neiman Marcus, both of which were publicly traded at one time before being taken private. But just because you shop there doesn't mean it's a smart play. Sure, 2006 saw J. Crew (JCG) sew up gains, but it also saw consumer brands such as Burger King (BKC) and Hertz Global (HTZ) trade only modestly higher than IPO levels.
Despite his optimism, Peterson warns that investors shouldn't just jump on the latest fad. As illustration, ethanol outfits such as Aventine Renewable Energy (AVR) and VeraSun Energy (VSE) sank after well-hyped openings.
Peterson is also bullish on U.S. markets as a whole. The past year was a strong one for offerings in London, Hong Kong, and other world markets, prompting hand-wringing over a decline in American stock exchanges. Peterson suggests that New York remains a formidable place for foreign companies to go public. According to Thomson, foreign companies accounted for more than $8 billion worth of deals and more than 20% of the U.S. total, the most impressive turnout since 1997.
So expect the tide of new offerings to roll on. Of course, sudden adverse currents can sink a buoyant IPO market, but at least in the short term it looks like smooth sailing.