End of One IPO Drought, Start of New One?

NEW YORK (Reuters) – Last week’s initial public offering by Grand Canyon Education Inc (LOPE.O: Quote, Profile, Research, Stock Buzz) broke the longest streak without an IPO in the United States since 1974, but it is not likely to open the floodgates to new IPOs anytime soon, bankers and analysts said.

The Arizona-based online university operator became the first company to manage to float shares in the United States since August, a 15-week period that saw 29 companies pull out of the IPO pipeline, according to Thomson Reuters data.

But Grand Canyon is not expected to have the same cathartic effect on the IPO market as the debut of Internet auction house eBay Inc (EBAY.O: Quote, Profile, Research, Stock Buzz) in September 1998. That deal single-handedly revived an IPO market brought to a standstill by a financial crisis in emerging markets. Proceeds from IPOs in October 1998 were 44 times higher than those of the preceding month.

The severity of the current financial crisis is likely to make the Grand Canyon deal a “one-off,” said Mark Hantho, global co-head of equity capital markets at Deutsche Bank.

“Regardless of how the IPO performs, it won’t open the door to more companies trying an IPO,” he said. “Frankly, companies venturing into this market are going to be valued less on their fundamentals than on general market sentiment.”


Sure enough, despite what analysts have called its strong growth, Grand Canyon twice had to reduce its price, settling for proceeds of $126 million, a bit more than half what it was hoping for when it filed in May. That makes the deal only the 18th largest of the 29 U.S. IPOs so far this year.

“It shows if you have a high-quality company in a defensive sector that you can get a transaction completed, albeit at a healthy discount to its comps,” Jen Caruso, a senior vice president of equity capital markets with Jefferies & Co said, referring to a company’s peers that are better known to investors.

One commonly used tool to value a company is its price-earnings multiple. Paul Bard, a research director at Connecticut-based Renaissance Capital, said that in this market, an IPO’s multiple would need to be about 30 percent below comparable, already public companies, while normally that discount would be about 15 percent.

After its deal priced on Wednesday evening, following a session that saw the Dow Jones Industrial Average .DJI fall 5 percent, Grand Canyon saw first-hand how investors are demanding larger-than-normal discounts from IPOs.

“The fact that it broke its IPO price shows investors are quick to run for the exits at the first hint of trouble,” Bard said of the shares’ 17 percent drop as soon as trading started Thursday. “IPOs are lower down on the totem pole.”


Grand Canyon stocks ultimately came back Thursday, finishing down only 1.25 percent. By Friday afternoon, they were trading slightly below their offer price of $12, a performance that might go some way to showing investors that an IPO can at least hold its own.

To get the markets rolling again, “you need to see positive returns in initial after-market trading; but it’s been poor and that’s not helpful,” Bard said.

Few IPOs this year have boasted strong first days, with two of the most highly anticipated IPOs of the year, by Web-hosting company Rackspace Hosting Inc (RAX.N: Quote, Profile, Research, Stock Buzz) and solar equipment maker GT Solar International Inc (SOLR.O: Quote, Profile, Research, Stock Buzz), seeing sharp falls from their offer prices in their debuts.


So far, 2008 has seen a 41 percent decrease in IPO dollar volume from last year at this time, despite the mammoth $18 billion Visa Inc (V.N: Quote, Profile, Research, Stock Buzz) deal in March, and bankers do not expect the remainder of the year to show any improvement despite the Grand Canyon IPO.

“It’s too early to say how this will all play out,” Hantho said. “The macro concerns are so large at the moment that unless there are absolute reasons to be out there, then I wouldn’t recommend anyone go out,” he said.

What the IPO markets ultimately need is for the broader markets to settle down, he said. And even then, the most solid companies will have to sit tight for a while longer.

“There are plenty of companies in this boat who can theoretically access the market, which would be a healthy step in rebuilding the markets,” Caruso said. “But this will not happen overnight — it will take some time especially for the higher beta deals,” she said of riskier deals.

There are currently no IPOs scheduled, though there are 136 companies in the pipeline.

“As we inch into ’09, I would say the reopening of the IPO market is more likely after the first quarter,” Hantho said.

By Phil Wahba
(Editing by Gerald E. McCormick and Maureen Bavdek)