Are IPOs Slowly Making a Comeback?
Two initial public offerings are taking place this week, with mixed results so far. Bridgepoint Education (BPI) went public on Apr. 15 with modestly disappointing results. Rosetta Stone (RST), set to launch on Apr. 16, sold its shares a day earlier for a premium, the first IPO to price above its anticipated range in almost a year.
Some observers consider the mere existence of these debuts a hopeful sign that the IPO market could revive this year. "It's highly encouraging," says William Smith, president and chief executive of Renaissance Capital, based in Greenwich, Conn. With just a few exceptions, "the [IPO] market's basically been closed since August of last year."
Until this week, only two IPOs had premiered this year: Mead Johnson Nutrition (MJN), a U.S. maker of baby food spun off from Bristol-Myers Squibb (BMY), and Chinese video game maker Changyou.com (CYOU). No further IPOs are formally scheduled.
Bridgepoint Education, a for-profit education company that runs Ashford University and University of the Rockies—both on campus and online—raised $141.8 million on Apr. 15. That was less than the company and private equity investor Warburg Pincus expected to raise. To attract investors, Bridgepoint cut its offering price to 10.50 per share, from an expected range of 14 to 16. On its first day of trading, the stock closed at 11.10, up 5.7%.
so far, Rosetta's winning IPO
Rosetta Stone, a fast-growing maker of language-learning software, has generated more investor enthusiasm. The company was planning to raise $100 million on Apr. 16, with shares going for 15 to 17. But the company sold 6.5 million shares at 18 on Wednesday, raising $112.5 million.
Rosetta Stone looks like "an outstanding investment," says Scott Sweet, senior managing partner of IPO Boutique. The company's revenue rose 53% last year and its profits surged 450%. Sweet notes that—in contrast to Bridgepoint, which faces several large competitors in the for-profit education industry—Rosetta is the first outfit of its kind to go public, with "brand awareness" more than seven times that of its closest rival.
The question is, can the IPO market really emerge from its deep slump? According to Dealogic, in the first quarter of 2009, IPO volume was down 95% from the same period a year ago. The main culprit, observers say, has been the broader stock market, often in steep decline and extremely volatile.
In tumultuous market conditions, when investors won't take risks on new IPOs, "everything just goes on hold," says Smith. "For the IPO market to come back, you don't need a booming market. You need a stable market."
Investment bankers selling IPO shares may have what they wanted—at least temporarily. The Standard & Poor's index of 500 stocks is up almost 25% since its bear market low on Mar. 9.
a "huge backlog" of potential IPOs
"There is a more stable environment, with some more predictability," says Tim Walker, an IPO analyst at Hoover's. Even when bad news arrives, he says, "We're not seeing the huge [daily] drops of earlier this year or late last year."
In that context, Smith thinks a "huge backlog of companies" will start preparing for IPOs. Expect new financial firms unburdened by toxic assets, he says, as well as companies benefiting from the Obama Administration's emphasis on infrastructure spending and the environment. Smith also believes that private equity firms are readying IPOs of large companies taken private in leveraged buyouts in recent years.
Sweet is not so sure the IPO market is set to bounce back. Many investors see more opportunity in established publicly traded companies than in risky IPO names, he says. And while Rosetta may represent a success story, the low offering price for Bridgepoint "shocked many people," Sweet says.
While these companies go public, many others that have cancelled IPOs await better market conditions. On Apr. 13, Current Media, an internet and cable company backed by former Vice-President Al Gore, withdrew its IPO. On Apr. 14, trucking operator Western Express did the same.
Changyou.com shares are up 36%
An IPO recovery will depend on whether the stock market sustains its recent rally or slips back into the wild volatility of the previous six months. In any case, Walker says, IPO investors now have lower expectations. The "buzz-driven or sexy IPO," trading at a premium valuation may be a rare sight even if offerings do revive somewhat, he says.
The slow IPO market in 2009 has offered one benefit to investors: In such a skeptical market, only the very best companies are able to sell shares to the public—and often at cheap prices. Indeed, a few of this year's IPOs are holding up quite well. Changyou.com shares are up 36% from its early April IPO. Mead Johnson is flat since its February IPO, And Grand Canyon Education (LOPE) has advanced 24% since it premiered last November.
"The common thread of these deals was that [the companies] were exceedingly profitable [with] excellent future prospects and had manageable debt loads," Sweet wrote Apr. 15.
Despite the past month's rally, many investors remain reluctant to make risky bets. Even if the IPO market picks up later this year, underwriters will need to present their very best merchandise at discount prices—or risk losing investors to other opportunities.