The market for public stock offerings froze up during the equity market dislocation following the collapse of Lehman Brothers in September 2008, and even though conditions have thawed over recent months the real rebound is on hold until 2010 when a number of high-quality companies could hit the market in a period reminiscent of another post-recession comeback. Even despite recent turmoil, the IPO market never truly recovered from its peak at the end of the dot-com bubble. There's a ways to go.
After a long dormant period, companies that would already be public in better times will be coming to market further along the development curve, but at valuations that are far more palatable to investors. Matt Regan, a managing director at W.R. Hambrecht, finds historical similarities to the IPO bumper crop of 1986, when tech heavyweights Microsoft (nasdaq: MSFT), Oracle (nasdaq: ORCL), Sun Microsystems (nasdaq: JAVA) and Adobe Systems (nasdaq: ADBE) all went public coming out of the lean years that followed the 1982-83 recession, posted strong returns for shareholders over the ensuing years and became industry heavyweights.
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Technology companies are going to lead this recovery too, Regan says, since they are not coming off a bubble like financial or housing-related stocks. With the merger option off the table for many companies due to the long lockup in credit markets that has only recently loosened, the IPO route is the logical exit for most companies backed by venture capital or private equity firms, Regan added.
Don't expect the IPO market to retreat to its bubble-happy ways of the late-90s though. Regulatory hurdles like Sarbanes-Oxley have made the IPO process far more rigorous than it was in the days of the tech bubble, and some management teams have no interest in taking their businesses to the public market. Phil Clough, a managing general partner at ABS Capital Partners who sits on the board of
Rosetta Stone (nyse:
RST), said some executives who have been through the process and then started new companies are not interested in the increased regulatory scrutiny and shareholder criticism that comes with the territory as a public company.
Not all management is soured on IPOs though. Bob Farrell is the chief executive of business software firm Metastorm, which pulled its S-1 registration filing in November 2008, when capital markets were in disarray and every day brought the threat of another shock to the system. Farrell told Forbes back in June that he still saw an IPO as a good way for Metastorm to raise funds for acquisitions that will boost its growth, but felt that institutional investors still weren't quite ready to jump back into software offerings due to the lack of appetite for any risk.
Conditions have changed though, and Farrell sees important signs of stability that are necessary to get the IPO market back on track. "If we had an S-1 out now there's no way I'd pull it," Farrell said, but for now Metastorm is content to execute its strategy and wait for more consistency before it resumes its effort to go public.
"I've met with bankers who are portraying the pickup in activity as a growing trend and pushing for deals," Farrell said, noting that the deals that have priced this year have performed well. But for the companies that have been able to come to market this year, it hasn't been all smooth sailing. Most have seen growth in their share price post-IPO, but there have also been hiccups. Rosetta Stone rose steadily after pricing its offering in April, but lowered its full-year guidance and pulled back a planned US$137 million secondary offering Aug. 17, just a few weeks after issuing strong second-quarter numbers at the end of July.
Regan says that type of misstep is magnified in a still fragile environment like the current one. To wit, Rosetta Stone's shares, which opened for trading at US$23.00 in April, then rose to nearly US$33.00, were cut by a third when it revised its outlook and have struggled to come back since.
Paul Bard, vice president of Greenwich, Conn.-based independent research shop Renaissance Capital that specializes in IPOs, says a healthy IPO market has a pace of about 15-20 offerings a month, a level it took six months to reach in 2009. Like other industry observers though, Renaissance sees signs of a pick-up, estimating another 20-30 deals will price by the end of 2009 between companies that have already registered their offerings and others that are making final preparations.
Aside from those already in, or ready to enter, the pipeline, Renaissance offered a handful of potential companies that may be poised to lead the IPO class of 2010. The names range from high-profile companies like Facebook and LinkedIn to venture-backed start-ups like ZipCar and Tesla Motors. Bard also points to private equity- or government-backed companies that may be looking to return to the public markets next year, including Toys R Us, General Motors and hospital operator HCA.
Jackie Kelley, the Americas IPO leader at Ernst & Young, found similar signs of renewed activity. Positive trends from the second quarter — fewer pulled filings, more deals pricing and moving out of the pipeline — have continued through the beginning of the third quarter. Kelley also points out that much of the action is going on behind the scenes and doesn't show up in present data. "Ernst & Young is working with so many companies right now that are either prepping IPOs or looking into getting the process started," she said.
Even if the IPO market has turned the corner and ready to bounce back — Regan cautions that "all bets are off if the market re-tests its March lows" — it will take much longer to determine if the crop of newly-public companies that come out of this recession will be able to hold a candle to the heavyweights that endured another tough period before launching their public lives in 1986.
Still, the opportunity for venture capitalists and other private owners to take companies public is an important driver for innovation in the broader economy.
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