Initial Public Offerings (a.k.a., IPOs) of common stock are an attractive means for companies to raise funds for expansion and/or debt retirement. The degree of IPO activity, not surprising, follows the cycle of the broader market, with more deals occurring in an upturn, when the cost of equity is lower, than during a pullback. In the 2007-2009 recession, the IPO market dried up, and did not begin to rebound until 2010. Currently, managements are looking to launch offerings since stock prices have staged a decent recovery. According to Dealogic, worldwide, 282 deals were made in the first-quarter of 2011, matching the number reported in the year-earlier period; the total value of deals slipped a bit, from $52 billion to just under $44 billion. Though the IPO market is unlikely to hit the dot-com boom value peak of 1996 (about $675 billion), it may well rival the strong pre-recession 2004 level ($175 billion) this year.
Since most companies’ fiscal years correspond with the calendar year, March-period IPO activity is usually at a seasonal low-point. Investors like to see yearend reported results before making a commitment to a new issue. The timing of deal execution in the initial three months of 2011 was particularly challenging due to stock price volatility brought on by the European sovereign debt crisis, natural disasters in Japan, political troubles in North Africa and the Middle East, and a softening of key U.S. economic indicators. Despite these negatives, equities markets have held up relatively well, and prospects for a steady macroeconomic recovery appear favorable. Corporate managers are optimistic about raising new money during the remainder of 2011 and 2012.
Emerging market economies weathered the recent downturn rather well, and local IPO activity, especially in China, India and Brazil, was reasonably healthy. With such countries now endeavoring to avoid overheating their economies, via tighter credit, the number of developing-market IPOs may ease some in the quarters ahead. Meanwhile, strengthening U.S. business suggests a nice up-tick in transactions. Notably, private equity firms, many of which invested heavily in companies during the last cyclical upturn, are looking to monetize those assets through IPOs.
So far this year, there have been some noteworthy transactions. Bain Capital and KKR & Co. (KKR) benefited from an IPO of 18% of HCA Holdings Inc. (HCA), which yielded about $3.7 billion. Also, Blackstone Group (BX) garnered rewards from offering shares of Nielsen Holdings (NLSN) for $1.9 billion and BankUnited (BKU) for $783 million. Too, Blackstone and Warburg Pincus completed a $540 million IPO of Kosmos Energy (KOS). And a group that included Highstar Capital, Carlyle Group, Riverstone Holdings and TCG Holdings closed on a $2.8 billion IPO of Kinder Morgan (KMI). Furthermore, private equity firm Apollo Global Management (APO) went public in a $565 million deal.
There are several other transactions now in the IPO hopper. Grabbing the headlines, lately, is the proposed $11 billion offering (in London and Hong Kong) of Swiss commodities trader Glencore International. Also, Apollo Global’s offering has sparked talk that peers Carlyle and Oaktree Capital might soon announce IPOs. And Blackstone has teamed up with Carlyle to offer $1 billion of Freescale Semiconductor common stock. We believe that Blackstone would like to do a transaction involving Hilton Hotels, as well, most probably in 2012. A $5 billion IPO of commercial real estate company Archstone might be in the works too. Elsewhere, Linkedin (LNKD) has just completed a $353 million deal, suggesting that more tech-company IPOs are waiting in the wings. Among them are Facebook, Groupon, Twitter and game-developer Zynga.
Recent IPOs, as a whole, have performed quite well, with many being oversubscribed. Zipcar (ZIP), for one, rose an impressive 56% on the first day of trading, lifting its enterprise value to $1 billion. Venture capitalists and hedge funds have been pumping much money into start-up companies in hopes of reaping gains in eventual IPOs; this may be pushing up pricing. Improved optimism in the market probably prompted Microsoft (MSFT - Free Microsoft Stock Report) to offer a rich price, $8.5 billion, for Skype, which was considering its own offering. In 2010, Groupon nixed a $6 billion bid from Google (GOOG).
Despite the excitement that often surrounds IPOs, we advise investors not to get caught up in the hype. A good number do not immediately turn out so well; an example is Vonage Holdings (VG). Investors should consider what multiples of sales or earnings that a company is priced at, relative to those of its competition, before jumping in. The company’s long-term growth prospects and debt leverage are also among the most important considerations.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.