IPO Market Gets Mauled
Just before they step into the public markets, several companies' IPO plans are getting broadsided with a one-two punch. Last week's staggering 512-point dive on the Dow preceded a steeper triple-digit decline brought on by Standard & Poor's lowering the U.S. credit rating.
All told, since Wednesday's close, the Dow is down by a whopping 9.1%, and below the 11,000 mark. Ouch! That's giving companies pause, and causing them to postpone their IPOs.
"Market volatility can be the death knell for IPOs," Paul Bard, vice president of Renaissance Capital, told me in an email interview the other day. "When markets crater and volatility spikes, investors tend to focus on their existing portfolios and shy away from putting money to work in new issues. No investor wants to participate in an IPO when there is a strong possibility that it could drop 5% to 10% out of the box."
Makes sense. Long-term investors are likely better off taking advantage of the markets' downfall to pick up blue-chip companies on the cheap, versus snapping up shares in a newly minted public company with no track record of publicly delivering on its promises to investors.
IPO road kill
The markets' malaise has already caused two U.S. companies -- flexible-spending-account software and services provider WageWorks, and medical care provider WhiteGlove Health -- to postpone their IPO launch from last week to this week. On top of delaying its IPO, WageWorks also cut its pricing range by more than 35%, to $8 to $9 a share.
The carnage continued into this week with IPO deals slated for U.S. markets. China-based Cathay Industrial Biotech, oil and gas interest holder Enduro Royalty Trust, and Latin American mobile payments, services, and entertainment company TIM w.e. all pulled their plans for launching an IPO this week, according to Renaissance Capital's IPO calendar.
Some of the IPO damage also extended offshore, said Bard. "Overseas, a planned $6 billion Hong Kong listing from China Everbright was delayed and not a single deal is being marketed internationally from Asia to Europe to South America," he noted in his email.
Bard lamented that the rapid deterioration in the markets will likely claim more IPO wannabes, which currently total 10 companies waiting to push out their deals in the next two weeks.
From this gang of 10, those companies most at risk of postponing their IPO plans will likely have smaller revenues and little, if any, profits. In particular, cloud-computing company Carbonite may be better off sitting out this round. Although it's in the hot sector of cloud computing, Carbonite has posted growing losses since 2006.
Then there's HomeStreet, a 90-year-old diversified financial services company. HomeStreet saw its net income fall between 2006 to 2008, then absolutely take it on the chin as the market went into convulsions in late 2008. The services company posted a $110.3 million net loss in 2009, and another loss of $34.2 million last year.
Is it safe to come out?
Some companies were fortunate to launch before the market meltdown, including music site Pandora Media (NYS: P) , which investors should beware; social networking biggie LinkedIn (NYS: LNKD) , which is giving investors three reasons to sell; Russian search engine king Yandex (NAS: YNDX) , which received plenty of investor love; and Wi-Fi connectivity company Boingo Wireless (NAS: WIFI) , which has seen less oing in its boing.
In this light, it would stand to reason that the companies with the best shot at launching their IPO in this turbulent market have a strong financial fundamental footing and great-guns growth prospects.
But why go out at all when it's raining cats and dogs? Isn't it better to stay private until the markets turn around, and a company can capture top dollar for its effort? Forging ahead with an IPO in this environment almost smacks of desperation -- something long term investors may want to avoid.
Bard, however, says not every company on Renaissance Capital's IPO calendar should be considered "desperate" from a capital perspective. He notes that companies invest gobs of money, time and resources meeting with prospective institutional investors during their road show to sell an IPO. Inertia can sometimes take over in moving the process forward.
Companies willing to apply the brakes to the IPO process this week aren't likely to make another go of it until after Labor Day, providing the markets have stabilized. That somewhat resembles the holiday calendar, surprisingly, where IPOs tend to slow down after Thanksgiving.
One would think that when it came to potentially making money, companies and investors wouldn't slow down for the holidays. A turbulent market, however, is a whole different matter.
At the time this article was published Fool contributorDawn Kawamotois not an angel investor nor limited partner in any VC funds, nor has a relationship with any of these companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.