Fall IPOs Will Face Tougher Scrutiny

NEW YORK (Reuters)- After a spate of disappointing initial public offerings over the last two months, the IPO market is on its traditional summer break for the rest of August.

But September may not bring much relief for underwriters as risk adverse investors are likely to shy away from all but the most compelling stories among companies coming to market.

“Solid businesses are what it takes,” said Linda Killian, a principal at Renaissance Capital, a Greenwich, Connecticut-based IPO research firm.

This year is on track to be the worst for U.S. IPOs since 2003. According to Thomson Reuters data, there have only been 29 so far this year, about a quarter of the tally at this time last year.

Investors have reason to be wary. Renaissance Capital's IPO Index, which tracks the performance of U.S. IPOs over the past 24 months, has fallen 18.1 percent this year, underperforming the Standard & Poor's 500 index and the Nasdaq composite index, which are down 12 percent and 7.6 percent, respectively.

But it has not been all gloom and doom. Some IPOs from 2008 have done well so far.

For example, medical device maker CardioNet Inc (BEAT.O: Quote, Profile, Research, Stock Buzz) has risen 88 percent since its March debut, propelled by its niche market position. Intrepid Potash Inc (IPI.N: Quote, Profile, Research, Stock Buzz) has soared 30 percent since its April launch, thanks to high demand for the crop nutrient which is its main product.

The year also saw the largest U.S. IPO ever, by credit-card processor Visa Inc (V.N: Quote, Profile, Research, Stock Buzz) whose shares have risen 34 since their March debut.

But others have stumbled. Verso Paper Corp (VRS.N: Quote, Profile, Research, Stock Buzz), which provides paper to the ailing magazine industry, has plunged 53 percent since going public in May, making it the worst performing IPO of the year. And last week, coal producer Rhino Resources Inc shelved its IPO after coal stocks hit a bumpy patch, one of 58 offerings that have been pulled this year.

SHOW ME THE MONEY

After getting burned on a number of IPOs and with the overall equity markets volatile, investors are setting higher standards for upcoming IPOs, said Francis Gaskins of IPO Desktop.

Yet, last week alone saw seven new filings, which analysts say is a healthy pace given the time of year and state of the markets.

Companies trying their luck include Massachusetts-based rechargeable lithium-ion battery maker A123 Systems Inc, whose chief executive told Reuters on Friday he expects the company to float shares within three to six months, and use the proceeds to expand manufacturing and pay off debt.

Other anticipated IPOs include AGA Medical Holdings Inc, a maker of medical devices for heart defects; Yandex, a Russian Internet search technology maker that has not yet submitted its filing; and Liquidnet Holdings Inc, an operator of an alternative equities trading system, according to Scott Sweet, a senior managing partner with IPO Boutique.

Gaskins says to attract investors now, the rule of thumb is a market capitalization of $250 million or more, at least $80 million in annual sales and revenue growth of 30 percent per year. Companies should have at least three quarters of growth before attempting an IPO, and a “stellar” quarter going right into it, he added.

Those tough standards may explain the drop in IPOs this year, according to David Menlow, president of IPOfinancial.com.

“Underwriters have not forced deals through just to get fees,” he said.

LESSONS LEARNED

Some sectors, such as health care and education, might fare better, while investors are likely to shun tech and biotech, Killian said, adding that no sector has been consistently hot.

It might even play against a company to be in a so-called favored sector, according to Menlow. GT Solar International Inc (SOLR.O: Quote, Profile, Research, Stock Buzz), whose shares sank on their debut, may have been the victim of a glut of offerings in the sector, Menlow said.

Investors have also not rewarded companies that use IPO proceeds to pay existing shareholders.

“The IPO market likes companies that use proceeds to grow their business with capital investments,” said Gaskins.

That, he said, could affect the market's interest in Liquidnet, whose IPO is expected in the fall.

Still, investors' current high standards could plant the seeds for a rebound.

“When the market first starts to turn around, IPOs tend to be priced to sell and because of that, IPOs tend to do better,” Killian said. “And when the IPO market rebounds from a period like this, the quality of the companies is better.”

By Phil Wahba
(Editing by Richard Chang)