IPOs: Investors Test the Waters, Warily

Sparked by the broad market rally, the market for initial public offerings is hectic and busy for the first time in two years.

But that doesn't mean that investors are snapping up every new IPO that debuts.

A123 Systems (AONE) was one of seven IPOs that flooded the market last week, the most to premiere in one week since 2007. The early success of A123's IPO helps explain why so many companies are clamoring to go public again. Four more IPOs are scheduled this week.

A young, innovative maker of batteries, A123 has deals with major auto manufacturers looking to expand their offerings of electric cars. Shares of A123 were originally given a price range of 8 to 9.50, but there was so much interest that shares were offered at 13.50. On the first day of public trading on Sept. 24, shares closed at 20.29, up 50%.

Active IPO Market "We're seeing clients start to get very excited about the IPO market—[in a way] they haven't been in months or even years," says Brent Siler, a partner at the law firm Cooley Godward Kronish who helps companies prepare IPO filings.

Scary market conditions kept companies away from the public markets for the last couple of years. But now, says Tim Walker, an analyst at Hoover's, the stock market is stable and firms believe they can get a fair hearing from investors. "My impression is there is plenty of pent-up supply and pent-up demand," Walker says.

The recent surge in IPOs has coincided with rallies for many riskier, small-cap stocks, says Canaccord Adams Director of Research Eric Ross. "Investors are looking for places to deploy their capital," Ross says.

To satisfy investor demand, many companies are preparing for IPOs in the future, Siler says. Big names examining IPOs include Hyatt Hotels, beef and pork processing giant JBS Swift, and Banco Santander Brasil.

Too Many Mortgage REITs But look closely at the IPO market and conditions don't seem as favorable: While investors are busy, they're also being picky.

Stock investors continue to show little interest in new mortgage real estate investment trust IPOs, for example. "These mortgage REITs have been disasters and they keep on coming," says Scott Sweet, senior managing partner of IPO Boutique. These firms are being sold as ways to profit off distressed prices in the real estate market, but there are too many of them, Sweet says. "They're all chasing the same distressed dollar."

New financial and real estate firms might be expected to have trouble in the aftermath of a financial crisis. Thus, the relatively successful IPO of an investment manager, Artio Global Investors (ART), might have been a good sign, Sweet says. Shares rose 5% on Artio's first day of trading on Sept. 24.

But other high-profile IPOs might give pause to private companies that think now is their time to go public.

Rocky Start for Shanda Games Select Medical Holdings (SEM) went public on Sept. 25 and was forced to offer fewer shares at a price of 10, below its initial range of 11 to 13.

Shanda Games (GAME) had a rocky start to its IPO on Sept. 25. A much-anticipated Chinese computer gaming firm, shares were priced at 12.50, the high end of its initial range. But the stock traded lower on its debut day, closing at 10.75.

Though Shanda's shares could recover, it wasn't an auspicious start for the biggest IPO of the year so far. Shanda had increased the size of its IPO to more than $1 billion.

Sweet believes too many IPOs came to market last week. That made it a crowded market alongside a "mind-boggling" number of secondary offerings, in which already-public companies issue new shares to raise more capital. It may have been too much for investors to handle in one week, he says.

This week, four IPOs are expected.

Some Quality Companies On Sept. 30, another REIT, Ladder Capital Realty Finance, trading as LCG, is scheduled to debut.

On Oct. 1, Talecris BioTherapeutics (TLCR), a biopharmaceutical company, plans to go public. And on Oct. 2, IPOs are scheduled for Echo Global Logistics (ECHO), a shipping and freight manager, and Education Management Corp. (EDMC), a for-profit education firm.

Sweet says Talecris, Echo Global Logistics, and Education Management are all high-quality firms.

But companies planning for IPOs know that a good balance sheet or strong profits aren't the only thing necessary to be successful. A good IPO also needs luck.

"There is still a sense that the markets are unpredictable and probably still volatile," Siler says.

And thus the rush for many IPOs. Companies want to go public while conditions are still favorable. If there's anything the current market has taught us, it's that timing is everything.

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