Market panic has scared many companies into postponing their IPOs, and lingering economic and political uncertainty raises the possibility that deals may not be revived at all this quarter.
“Given the current environment, we believe issuers are going to be more cautious about launching in the market post-Labor Day,” said Frank Maturo, co-head of Bank of America Merrill Lynch’s Americas Cash Equity Capital Markets.
Market volatility continued this past week for its fourth straight week. Yesterday, the Dow fell 172.93 points (-1.57%) to 10,817.65, and the index was down 451.37 points (-4.17%) from a week earlier.
The volatility apparently is a surprise to many peHUB readers who took a recent poll about the IPO market. The largest percentage of those who voted (33%) said the IPO window would reopen “soon” and that the market turmoil is a “temporary setback.”
The IPO market generally shuts down in the second half of August as portfolio managers and bankers take vacation, but there are usually billions of dollars raised in the first half of the month.
So far this August, U.S. IPOs have raised less than $1 billion — down by a third from a year earlier, according to Thomson Reuters (publisher of peHUB). Further evidence of the pullback: the postponement of 10 of 12 IPOs scheduled for the week of Aug. 8.
With August entering its dog days, it is unlikely that any IPOs will be completed until after the U.S. Labor Day holiday in early September. The question now is how quickly they will come back after that.
Since 2009, more than 600 companies have registered with the U.S. Securities and Exchange Commission for IPOs, but have yet to complete the process. None is on the calendar to price in the next two weeks.
“Equity deal activity in the third quarter is likely to be down for all firms if the current volatility persists,” said Maturo.
Increased volatility makes it hard to price IPOs, which typically are offered at a roughly 15% discount to publicly traded competitors.
If investors are nervous about the markets, they are likely to demand a bigger discount. That can create a stalemate with the issuer.
Such a situation may be the order of the day, given current doubts about rapid recoveries in U.S. and European economies and the likelihood of continued volatility.
The CBOE volatility index (.VIX), an options product that measures market gyrations and investor anxiety, has almost tripled from a level of around 18 in mid-July to a peak of 48 on Aug. 8, its highest close since March 9, 2009.
“Whether or not companies can go public depends on whether this is temporary volatility or whether the economy is really in bad shape,” said Len Blum, a managing director at Westwood Capital. “I think it’s the latter. I think it’s going to be a tough IPO market.”
Blum, a former banker at Prudential Securities, said only companies in severe need of cash would test this IPO market.
Only two IPOs priced in the last two weeks, and both raised less money than expected. SandRidge Permian Trust (NYSE: PER), an oil and gas royalty trust, raised $540 million in its offering, 14% below the midpoint of its filed price range. Web-based computer backup company Carbonite Inc. (Nasdaq: CARB) came up 38% short of expectations with its $62.5 million deal on Aug. 10.
Carbonite — which raised $69.7 million in VC before going public and whose largest shareholder is Menlo Ventures — priced its IPO at $10 per share, down from an expected range of $15 to $17. Its share price closed at $13.89 yesterday, up 27 cents from Thursday.
Still, there could be a silver lining. The timing of the rout could dampen its impact and give the market a chance to recover, said James Palmer, head of the Americas equity syndicate at UBS AG.
“The best part of what has happened to the IPO market is that it has happened in the middle of August.”
By Clare Baldwin, Reuters
Additional reporting by Lauren Tara LaCapra and Rodrigo Campos of Reuters and Lawrence Aragon of peHUB.