IPOs Stand Tall amid the Tumult

Even after the stock sell-off, new offerings continue to come to market with some attractive opportunities for savvy investors

When the markets get choppy, risky investing categories like initial public offerings tend to suffer. Investors' increasing risk aversion may lead to companies having to lower their initial offering prices—or scrub the deals altogether. However, the recent market turmoil that started with the sell-off in China has not overwhelmed the IPO scene, and it may create some strong opportunities for savvy, if daring, investors.

One good example is the Mar. 15 BigBand Networks (BBND) offering. BigBand, which sells a platform for helping cable companies deliver video services such as high-definition TV, saw its stock climb 30% above the pricing level on its first trading day. "The interest in that deal was spurred by extremely rapid growth in a growing market," says Paul Bard, vice-president of IPOHome.com. "It makes you think of how well it would have done before the sell-off."

Despite the market's concerns over subprime loans, Bard says there is lingering demand for IPOs from strong companies, especially since volatility has caused investors to take some money off the table. Even those with weak debuts can present buying opportunities. Last year, companies like Synchronoss Technologies (SNCR) and Techwell (TWLL) stalled out of the gate before finally performing well. In an even more striking example, online marketplace giant eBay (EBAY) debuted inauspiciously in 1998 before bringing phenomenal returns to investors in the years that followed.

Fair Going So Far

There have been some disappointing deals in 2007, but as a whole, performance has not been bad. According to Thomson Financial (TOC), 36 deals have priced this year through Mar. 15, as compared to 38 during the same period in 2006. But this year's average deal price was $223.2 million—slightly higher than for the same period in 2006. At just over $8 billion, the total amount raised was also higher than for the same period in 2006.

It's more of a surprise that the IPOX 100 index, which tracks recently debuted companies, has slightly outperformed the Standard & Poor's 500-stock index year-to-date.

Volatility does, however, ensure that some offerings will not meet expectations. One recent laggard was the much-anticipated Clearwire (CLWR) deal. Despite having wireless mogul Craig McCaw as a founder and chairman, and major investments from Intel (INTC) and Motorola (MOT), investors were wary of the unprofitable company, which provides powerful wireless Internet networks.

Some IPOs currently in the hopper will undoubtedly disappoint. But Bard says Aruba Networks, cell-phone game provider Glu Mobile, and Haynes International, a provider of high-performance alloys, are among the most promising deals slated for the coming weeks.

Scaling Down Expectations

Josef Schuster, chief executive of IPOX Schuster, a financial services company that puts out the IPOX 100, says that the key to successful deals is for offering companies to remain flexible on pricing, not exactly what the first-timers, or their underwriters, want to hear. Schuster points to last year's successful MasterCard (MA) offering, in which the plastic purveyor lowered its offering price to slightly below its estimated range, but realized spectacular gains afterward.

He cites this year's highly anticipated offering from Fortress Investment (FIG) as an example of what not to do (see BusinessWeek.com, 2/9/07, "Investors Storm Fortress IPO"). After pricing at $18.50, at the top of its range, shares shot up above $30. But investor sentiment has changed, and the stock closed Mar. 16 at $25.74. Shares were "too richly priced" and investors saw the stock was pushed up by a few share flippers. Once they quickly sold off shares, Schuster says "everyone wanted to get out."

He's more bullish on a potential multibillion-dollar offering for part of private equity giant the Blackstone Group that could soon be filed, according to a Mar. 16 report in The Wall Street Journal. Investors, he says, should think of the IPO as an investment bank deal, since Blackstone's operations are more diverse than those of Fortress. A Blackstone offering could also lead the way for other private equity players such as Carlyle to head for the public markets, Schuster says. "Usually the first mover gets a better multiple."

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