History No Guide for IPO Turnaround Timing

NEW YORK (Reuters) – The market for initial public offerings is facing its worst drought in decades, and history gives few clues as to when the market will turn around.

The IPO market has typically reopened fairly soon after a slumping stock market begins rising again. But this time there will need to be an acceptance of sharply lower prices by issuers for there to be any kind of snap-back when the current bear market ends.

So far, the crisis has seen record levels of stock market volatility, brought a roughly 35 percent decline in equity markets from their peak and led to investment bank failures such as that of Lehman Brothers and Bear Stearns.

“There’s not much to be learned from previous downturns as far as this IPO market is concerned,” said Reena Aggarwal, a professor of finance at Georgetown University in Washington, D.C. “This time around, the credit markets have come to a complete halt.

“If triple-A paper can’t be financed, if banks aren’t making intraday loans to each other, you can’t even begin to think about the IPO market.”

The next six to nine months are not likely to bring much relief, she added.

“The market is in a bunker mentality of ‘stay safe and don’t go looking for trouble,'” said Nick Einhorn, an analyst with Connecticut-based Renaissance Capital who co-authored a report last week about the timing of the IPO market’s comeback.

Though each economic cycle is different, according to Jay Ritter, a finance professor at the University of Florida at Gainesville, IPO activity tends to pick up soon after the stock markets start to recover.

After the early 1980’s recession ended, IPO activity perked up quickly, with the number of deals up six-fold between September and December 1982. IPOs surged after the early 1990’s recession, and were quick to recover after the Asian financial crisis and implosion of hedge fund Long-Term Capital Management briefly brought IPO activity to a standstill in 1998.

“For IPO volume to get off of life support, it does require an upturn in the Nasdaq and broader market,” Ritter said, adding that a 20 percent increase in market indices would be needed to get a modest amount of deals going.

Even should that happen, the credit crisis will force companies to lower their IPO pricings even more than they typically have in past market troughs.


Companies striving to go public are not the only ones with their hands out. Several major companies reeling from the crisis, including banks, have turned to share offerings for massive injections of capital, crowding out IPOs, Aggarwal said.

Since early September, General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), JP Morgan & Co (JPM.N: Quote, Profile, Research, Stock Buzz), Bank of America Corp (BAC.N: Quote, Profile, Research, Stock Buzz), Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and MetLife Inc (MET.N: Quote, Profile, Research, Stock Buzz) have issued billions of dollars of new shares.

Share offerings by companies already public have totaled nearly $48 billion in that period, according to Thomson Reuters data, outstripping total U.S. IPO proceeds of $26 billion year to date.

Similar moves still loom, from Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz), which plans to raise $20 billion to help finance its Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz) takeover, for example.

And with government debt ballooning, raising capital will be even more competitive, Aggarwal said, meaning IPOs will have to be priced more compellingly to attract investors.

The Renaissance Capital report says the market could come back as soon as after the elections if companies in dire need of capital, together with their underwriters, swallowed a “bitter pill” and accepted smaller deals.

Even that were not a fool-proof recipe for success. Chinese underground mall developer Renhe Commercial Holdings Co Ltd (1387.HK: Quote, Profile, Research, Stock Buzz) raised $435 million last week after its IPO launch was postponed, and proceeds were cut from an initial estimate of $658 million. Still, Renhe’s shares dropped 2.7 percent in their debut.

“It’s like when you try to sell your house and you cling to the price you could have got a year ago,” Einhorn said. “But discounts will need to widen for IPOs to come back.”

Venture capitalists and private equity funds eager to unload portfolio companies will also have reset their expectations, said Ritter.

“There’s a lot of wishful thinking on the part of partners at these funds,” Ritter said.

Once valuations have fallen low enough to make IPOs competitive with established stocks, investors will jump in, lest they miss out, said Aggarwal.

“Then there will be a herd mentality and everyone will come back to the markets,” she said.

By Phil Wahba
(Editing by Gerald E. McCormick)