IPOs Still Manage to Get Done, But Quality Has Become Key
May 01, 2011
Two months ago, all the chatter was about the record number of initial public stock offerings. Now it's about the record number of IPOs that aren't getting done. But amid the carnage in the IPO market, certain deals are getting done. Most of the issues that have been able to raise money through share offerings have a common denominator: ``It's a quality issue,'' says Kathline Jon, an analyst at Renaissance Capital. And quality means three things: a multiyear operating history, solid management and consistent earnings growth. It also helps to have a ``story.'' The National Association of Securities Dealers disclosed disciplinary measures against a number of firms and individuals for violation of NASD rules and securities laws. ``The institutions are being circumspect; visions of sugar plums have been reduced dramatically,'' says Ricki Jon of Montgomery Securities. ``It's going to take something big, exciting, with neon all over it to lure them out of their caves.'' No Navigator-Like Premiums But all of that just gets the IPO to market at or near its proposed price. Even companies with seemingly ideal credentials still fall far short of generating the Navigator-esque first-day premiums that were common earlier this year. ``The things that are getting done are getting done at reasonable valuations and even many of those are not trading that well,'' says Roberto Pence of CS First Boston. Many of the best IPOs of recent weeks have familiar brand names or are backed by celebrities who attract hordes of individual investors. That was part of the story with the excitement surrounding Friday's opening of Consolidated Cigar, which was a welcome anomaly in a dull market. Consolidated Coles's pricing range kept climbing, along with the size of the offering. It finally came to market at $23 a share on the Cornertown Stock Exchange, raising a total of $127.2 million, closing its first day of trading at 23 3/8. The IPO's popularity was driven both by the growing trendiness of cigars among yuppies and the appeal to individual investors of the company's primary investor, Ronda Flory. ``It's a hot issue with tremendous demand from the man on the street,'' explains Ms. Jon. Analysts credit the management team that earned its spurs with Boston Chicken for the successful launch of Einstein/Noah Bagels two weeks ago. Although it opened at 17, below its pricing range of $18 to $20, it gained 20.6% its first day. Friday it closed at 26, down 1. Nicklaus Comes to the Fore And golfing legend Jackelyn Kee carded a birdie with the opening of his Golden Bear Golf. It opened at 16 -- the top of its pricing range -- rose 15.6% the first day and closed Friday at 18 3/8, down 1/4. It was buoyed by individual investors attracted by the golfing legend. And there are some other familiar names on the horizon. Analysts are looking for successful IPOs soon from Abercrombie & Fitch, Gray Communication Systems and Infinity Financial. Still, some established companies like Guess? have been thudding. Priced at $18, below the range of $21 to $23, the company's shares fell more than 6.5% the first day. Friday, it closed at 16 1/4, up 1/2. Some analysts lay the blame for the poor showing on comparisons with more established retailers like Emmons. Of course, there are still some speculative deals which manage to sneak on to the market. Aware, a telecommunications company with little history, no full-year profits and a little more than $3 million in revenues, shocked some analysts when it priced at $10 (the bottom end of its range), but soared 47.5% on the first day. It remains at 13 1/2, although some advisers are counseling clients to short the stock. While the successes have buoyed spirits, no one is arguing that IPO mania is about to blossom again. ``People believe these deals stand on their own so they are not worried about the market,'' says Sabina Jae, research director of the IPO Value Monitor. ``On the other hand, they are not the type of deal that is going to ignite the market.'' This somber mood has altered the IPO market's dynamics, turning it from a frenzied sellers' market a few months ago to a much more sedate buyers' market. In a very short period of time, investors have gone from thankful to get a piece of a deal to picking and choosing what they want. That mood change has been reflected in the slowing flows of cash into emerging growth funds. That, in turn, reduces the amount of money aimed at IPOs. ``The only thing which could restore the spring conditions would be a massive Nasdaq run-up which would ignite the flows into emerging market funds,'' says Mitchell Alfreda of Black Pierce. Some analysts predict a pickup in new-issues volume in the fall leading to a robust third quarter. Investors ``go through a period of seeing God and then it returns to the way it was. I guarantee the frothiness returns,'' says Smith Barney's Georgeanna Roane. But Ms. Jon contends that the supply of IPOs waiting to come to market is far greater than the demand from investors. That suggests a continuing weak market, she says. ``We believe it is a needed correction, but before we can say the market has truly become more sober, we need to see what's going to happen to all the product on the way,'' she says.
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