IPO market rebounds in third quarter, and more deals are in the pipeline

ipo-market-bounces-backAll of a sudden, there's a queue for IPOs. While few observers were paying attention, and the IPO market was assumed to be all but dead, the line was forming and growing.

The IPO pipeline increased to 34 registrants seeking to raise $10.9 billion as of Sept. 30, up from 28 registrants seeking to raise $7.6 billion at the end of June, according to Ernst & Young LLP's quarterly U.S. IPO Pipeline study.

"Patience and preparation are paying off. This rebound of activity rivals the number of new registrants a year ago, which gives the total pipeline a bounce even as many companies go public," said Maria Pinelli, Ernst & Young's Americas Director, Strategic Growth Markets, in a prepared statement.

The new registrants represent the largest deals in over a year. In total, they seek to raise $11.353 billion of capital, an average of $378.8 million per company. Most significantly, meat processor JBS USA Holdings, Inc. intends to raise $2 billion. The Shanda Games Limited (GAME) IPO raised $1.04 billion in the third quarter, making it the largest U.S. IPO to date this year.

According to Hoover's IPO Scorecard, the number of U.S. initial public offerings increased 240 percent year-over year for the third quarter. This marks the first triple-digit percentage increase in U.S. IPOs since 2004. Seventeen companies went public in the third quarter on the major U.S. exchanges, raising $5.5 billion, compared to the same period last year, when just five companies went public, raising $917 million.

What's driving the uptick? "A combination of strong pent-up deal flow and rebounding capital markets and rebounding economy," said Jeffrey Goldberger, managing partner at KCSA, an investor relations firm in New York. When the markets fell apart, the IPO market came to an almost complete standstill. Numerous companies were poised to float IPOs, but demand from institutional investors dried up.

Successful IPOs by household names such as language-learning software provider Rosetta Stone (RST) and OpenTable, Inc. (OPEN), which takes online reservations for restaurants, raised eyebrows.

Generally, investors, underwriters and IPO hopefuls are seeing more predictability than they were six months to a year ago, explained Tim Walker, who leads Hoover's quarterly IPO analysis.

If the economy stays stable, there will likely be more volume, in terms of both the number of deals, and the average amount of money of each deal. "If the economy slides for any reason, all bets are off," said Walker.

According to Jeremy Swan, a director at Protiviti Inc., and a member of its Private Equity and Public Company Readiness practices, the question is: "Is this a window of opportunity that could close at any time, or is it sustainable? It remains to be seen."

It's hard to know what the uptick will mean in the long-term, but in the short-term, it's a shot in the arm for the investment community, said Goldberger.

The increased activity is a win-win. "Investors are coming back to play," contended Daniel Seiner, managing director at investment banking firm Ladenburg Thalmann. "Companies need capital because the lending markets shut down for some time. All this is good dynamics for the IPO market."

The identities of the players are interesting, too. Emerging markets like Brazil and China are in the mix, as are companies that vary in size, geography and industry. For example, IPO filings from Oct. 9 to Oct. 21 included companies involved in firearms, an investment bank, a manufacturer of generators and a producer of tissue products.The deals are larger, in part because institutional investors in this environment are more comfortable investing mature companies that have stories, existing businesses and strong management teams -- companies that are sustainable. As the economy strengthens, smaller companies and smaller deals will get in on the action too.

"The next tier might also include more technology and companies with growth stories," said Howard Ross, a partner at private equity firm L.L.R. Partners.

There's an expectation that there will be more IPOs from companies currently owned by private-equity shops. Market conditions the past couple of years haven't favorable for private-equity firms to cash out on their investments, because they couldn't expect to reap a good return through either IPOs or M&A activity.

What's the significance of all this? "The rebound is unusual in that it is happening relatively promptly following a near collapse of the economy," said Marc Rossell, a partner at the law firm of Chadbourne & Parke who specializes in capital markets.

And, the good news is -- investors are buying. Said Seiner: "Companies have digested the new reality of the capital markets. The last 18 months, companies saw decreases in their operations and they said to themselves that they wouldn't issue equity because of the financial crisis.They were going to wait for it to be over. But they realize this is a new reality. You have to be realistic about pricing. Investors and issuers are finding common ground for issuing equity. They are finding a happy medium."

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