Risk

A Fall Run for IPOs?

Equity-market indices are up and the “fear” index is down, presenting some companies an opportunity to go public.
Vincent RyanSeptember 18, 2012

What’s that about a broken market for IPOs? The calendar for initial public offerings is filled with companies set to price deals this week, with as many as 10 of them lined up to debut on U.S. equity markets.

Combined, the companies with scheduled pricings seek to raise as much as $4 billion. A majority of that total is accounted for by Group Financiero Santander Mexico, which hopes to raise $2.7 billion by selling American Depositary Shares on the New York Stock Exchange.

The second-largest deal, at $460 million, is from Spirit Realty Capital, a noninvestment-grade real estate investment trust that leases single-tenant commercial properties and provides leaseback financing, followed by a $250 million offering from Capital Bank Financial, a Southeast-based bank holding company.

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The money expected to be raised from the scheduled IPOs would make September the biggest month by dollar volume since May, when Facebook first listed its stock. The failure of the Facebook share sale, which was compounded by technical glitches when the shares first started trading on Nasdaq, has hung over the IPO market the entire summer.

Meanwhile, the stock markets have been on a tear. The S&P 500 has risen almost 10% since late June, and the CBOE Market Volatility Index (VIX) — the markets’ “fear gauge” — fell below 15 last week, within the range experts say is favorable for pricing IPOs.

In addition, the share prices of the 22 companies that listed the past three months are up 34% on average from their issue level, according to a report issued on Monday by Renaissance Capital. Nineteen of the 22 are trading above their offer price, and 12 are up more than 30%.

“This would be the time that the market would pick up,” says Elizabeth Saunders, chair of strategic communications for the Americas at FTI Consulting. “Equity fundamentals are OK, and the quality of companies being put forward is high, so it would make sense that the market would look good the next four to six weeks, assuming no massive global displacement or awful news.”

But Saunders cautions that so far there is no indication that the IPO market is wide open for all kinds of deals. “The companies left in the IPO pipeline are ones like Restoration Hardware, a great brand and a really profitable company that should be easy to sell as an IPO,” she says. Furthermore, the pricing on these current deals is rational, and the issuers aren’t trying to sell huge pieces of themselves, she adds.

“If bankers get a little bit more aggressive in pricing and deal size, then you really have a window,” says Saunders. If that doesn’t happen, however, it could indicate that there is an “underlying tenderness to the market, and that nobody wants to push too far,” she cautions.

As for any fear that the Facebook glitches will happen again, Saunders says it’s a nonissue for institutional investors. “There may be corporates that are looking at Nasdaq versus the NYSE differently, but I haven’t spoken to an individual investor who has a fear of a pricing or trading anomaly because of what happened with Facebook,” she says.

This week’s pricings calendar includes two companies that used the JOBS Act provision allowing emerging growth companies to submit a confidential first draft of their registration statement to the Securities and Exchange Commission. Once the filing is made public, the issuer must wait 21 days to commence a road show. Trulia, an online residential real estate marketplace, and biotech firm Regulus Therapeutics, both scheduled to price this week, flipped the switch right after the 21-day minimum had passed. Both set the terms for their IPOs on September 7.

Other deals coming to the end of their 21-day waiting period include the highly anticipated offering from software vendor Workday, as well as share offerings from LifeLock, Amira Nature Foods, and Taylor & Martin Group, according to Renaissance Capital.

A July survey of investment-banking executives by BDO USA found that 55% of them believe the JOBS Act will increase the number of businesses listing on U.S. exchanges.

“I don’t think we are going to have a massive rush in the short term,” FTI’s Saunders says of the JOBS Act’s effect on IPO volumes. “You still need strong underlying capital markets and investors willing to pay for small and microcap companies. But in the long term, [the JOBS Act] will have a significant impact.”