Capital Markets

Not Your Father’s IPO Market

Many companies going public lately don't fit with the standard profile of unheard-of upstarts.
Stephen TaubMarch 27, 2008

This is not your father’s IPO market.

As the overall stock market has shown some signs of recovery in recent days, the market for new issues seems to be coming alive as well. Many of the companies that in recent weeks either went public or filed plans to do so are not, however, the usual suspects — small, fledgling companies seeking capital. Rather, to use Wall Street parlance, they are “special situations.”

Perhaps the most high-profile deal was the initial public offering of Visa. The fact that it is a seasoned company that raised $19.1 billion makes it an atypical IPO right off the bat. Sure enough, since it went public earlier this month, its shares have surged about 44 percent.

Meanwhile, four real-estate investment funds are planning IPOs. They plan to invest in government-backed or highly rated mortgage securities, The Wall Street Journal reported.

The four funds are American Capital Agency Corp., MFResidential Investments Inc., Hatteras Financial Corp., and Point Asset Management Inc.

The companies, structured as real estate investment trusts, or REITs, aim to benefit from the spread between their cost of capital and how much they earn on their investments. Because they are starting from scratch, they are not saddled with old, lousy investments.

“The thought process is that you can essentially market to investors a de novo company, with a clean balance sheet and no legacy investments fraught with the possibility of major write-downs,” attorney Michael Zuppone, head of the securities and capital-markets group at the law firm of Paul Hastings, told The Journal.

Then there are the so-called blank-check companies. Also called special-purpose acquisition companies, or SPACs, they are basically shell companies designed to acquire attractive operating businesses. About a dozen have come public this year, and nine of them received initial funding from merchant banks, hedge funds or private-equity funds.

The latest blank check IPO being planned is Liberty Lane Acquisition, an offering from Goldman Sachs Group. The deal is expected to raise $350 million.

Goldman says it is altering the typical structure these deals normally take. For example, Liberty Lane management is putting up a smaller stake of its own money than is usual and will receive a much smaller share of the company than is the norm.

Goldman also is taking a smaller underwriting fee — 6 percent versus the standard of 7 percent for most SPACs, according to The Journal.