Many public offerings are not hitting their price targets, but observers say that’s no cause for concern
By Ken Tarbous
April 30, 2010
Seven initial public offerings priced on April 21 — the most in a single trading session since November 2007 — but only three of the companies got the price they wanted.
As Wall Street underwriters see it, the inability to hit targets suggests that investors are challenging what is presented in deal prospectuses, particularly when it comes to valuing a young business.
"The first two months of the year were somewhat cautionary with price sensitivity from institutional investors," said Phil Drury, a managing director in equity capital markets and the head of Americas syndicate at Citigroup.
Specialists with Wall Street syndicate desks are not exactly worried about IPOs that are being completed below their target price range. For starters, getting any new company into the public markets is a big accomplishment after the new-issues drought of 2008 and 2009.
Nevertheless, only about half the deals that have come to market this year — 34 in all — have priced within or above their target range. Market participants say the companies that have gone public include small-cap businesses that are involved in life sciences or technology and need the money from an IPO to fund their cash-hungry businesses.
Dealmakers expect larger businesses from a wider range of industries to go public in the third and fourth quarters, and that may improve investor appetite and ensure that businesses sell their stock at or above their targets.
"The remainder of 2010 will be strong for IPOs, both because buyers seem to be interested in solid offerings, as well as the fact that the IPO backlog has more mature companies than usual," said Peter Falvey, co-head of technology investment banking at Morgan Keegan. "Without a decent IPO market, companies have tended to stay private longer and therefore are now more mature and arguably better positioned to execute higher-quality IPOs."
The three April 21 issues that hit their price targets were the software company SPS Commerce, the biotech company Codexis and the software maker DynaVox.
SPS had expected to sell 3.3 million shares for $11 to $13 each. It sold 4.1 million shares at $12 each, raising $49.2 million. Codexis, whose target range was $13 to $15 a share, sold 6 million shares (as it had expected) at $13 each. Its IPO raised $78 million.
DynaVox, whose target range was $15 to $17 a share, sold 9.4 million shares at $15 each. The offering raised $140.6 million.
The other four IPOs that day did not fare as well.
THL Credit, an investment firm taken public by Thomas H. Lee Partners, had planned to sell 13.7 million shares at $15 each. Instead, it sold 15.3 million shares at $13 each and raised only $199 million. Alimera Sciences, a biotech firm, priced 6.5 million shares (or 500,000 more than it had planned to sell) at $11, well below its target range of $15 to $17. The IPO brought in $71.5 million.
Global Geophysics, a gas and oil services company, expected to sell 11.5 million shares for $15 to $17 each. It sold 7.5 million at $12, raising $90 million. Mitel Networks, a communications company, expected to sell 12.1 million shares with a price range of $18 to $20. It sold only 10.5 million at $15 each, raising $147 million.
"It's definitely deal specific," Drury said. "Overall we think appetite is strong. Investors are working through their valuations on a name-by-name basis."
Bankers said people should not make much about the fact that seven deals came to market on a single day; most bankers chalked it up to coincidence. Typically, underwriters like to sell new issues on a Tuesday or Wednesday, because they like to interact with investors a day before the actual pricing. Also, deals set to set to price on a Thursday could hit snags that force them to wait until the following week, bankers said.
As of April 27, 34 IPO issues have made it to market in the U.S. this year, generating proceeds of $4.7 billion, versus 52 first-time equity issues that raised $16.7 billion in all of last year, according to Thomson Reuters. In 2008, 31 IPOs raised $26.7 billion.
Syndicate pros say it may be too early to proclaim a turnaround for the IPO market, even if broader equity indexes like the Dow Jones industrial average, the Standard & Poor's 500 and the Russell Small Cap have bounced back.
"It is difficult to know how long the IPO market will stay open. The IPO window tends to become more open or closed based on the overall health of the equity markets," said Falvey.
Nevertheless, the seven issues in a single day last week clearly raises hopes on Wall Street and in boardrooms that the IPO market has reopened, providing an important source of liquidity for venture capital firms and private-equity sponsors.
"We're operating in an environment currently where valuations have recovered and institutional investors are seeking returns through new issues," said Drury. "That's a meaningful turnaround from where we were 12 months ago."
Symetra Financial Corp., a Bellevue, Wash., financial services company took in $364.8 million in proceeds in its IPO, which was the largest so far this year as of April 27. Primerica, a financial services company spun off by Citigroup, had the second-largest, raising $320.4 million, followed by Generac Holdings, a Wisconsin generator company backed by private equity, with $243.8 million.
San Diego REIT Excel Trust brought in $210 million of proceeds in the largest issue to price last week.
Bankers say the traditional IPOs in the range of $500 million to $1 billion could make a return; many large offerings are expected to come from private-equity sponsors seeking to sell off companies in their portfolios. Large deals may benefit from the return of institutional investors like pension funds and endowments.
"The class of IPOs currently in registration, along with the recent acceleration of filings, provides a better look into the health of the market in the latter part of the summer and the rest of the year," said Brad Miller, global co-head of equity syndicate at Deutsche Bank. "The dialogue around some of the larger deals, such as the sponsor-related IPOs that may come in the third quarter and beyond, will be the real bellwether with respect to the depth of investor appetite and how well these deals are received and trade in the aftermarket."
This year, IPO registrations have jumped. At the end of first quarter, 80 companies had registrations on file with the Securities and Exchange Commission, according to Ernst & Young. They are seeking $11.4 billion, but 26 companies planned to raise $100 million or less.
A quarter earlier, 54 registrations were on file, with companies seeking $10.3 billion. On March 31 of last year, there were 44 registrations on file for $11.7 billion.
"In the tech sector, we're seeing many in the venture capital community and at various corporates now looking to access the capital markets," said Pete Chapman, co-head of Americas equity capital markets at Bank of America Merrill Lynch. "Generally speaking, the market has been extremely receptive to tech offerings given the propensity of strong visible cash flows, low leverage and solid growth."
