After falling off the radar for three years, the U.S. IPO market is off to its best start since before the financial crisis. And with several high profile technology companies set to go public this year, it's likely to carry that momentum forward.
Companies around the globe have raised more than $26 billion through initial public offerings (IPOs) this year, a 20% increase over last year and the best start on record, according to Dealogic. Globally, 15 IPOs were crammed into the first two weeks of February – a month that last year had seen a total of just four IPOs.
Not since 2007, when 17 companies listed, has the IPO market been so active. By comparison, just three companies listed in February 2009 and four in 2010.
A big reason for the increase was a flurry of activity in the United States, which had previously lagged the Asia Pacific region. There were 24 U.S. IPOs in the first month and a half of the year, compared to 13 during the same period in 2010, according to IPO research firm Renaissance Capital in a Feb. 23 report.
The largest IPO so far this year has been Kinder Morgan Inc. (NYSE: KMI), which raised $2.86 billion through its Feb. 10 offering. The company raised a total of $3.29 billion after underwriters exercised an overallotment option, making it the largest U.S. energy IPO in more than a decade.
With Kinder Morgan taking the lead, U.S. IPOs raised a total of $8.1 billion by mid-February – up from $1.9 billion last year, according to Renaissance.
"After strong IPO issuance in November and December, the IPO market seems to be sustaining the momentum seen at the end of 2010," Renaissance said. "These are signs that the IPO market is back to normal levels of issuance that is expected in a growing economy."
The firm said the United States would continue to lead the world, as 34 companies are still on tap for IPOs this year. Dealogic's IPO backlog stands at $48 billion, with about a third of that destined for U.S. markets.
What's more impressive, though, is that the U.S. companies set to go public in the weeks and months ahead are healthy prospects with solid fundamentals – not paper tigers.
"Most of the companies that are in registration or are starting the process, are companies that have really good prospects," Mark Baudler, a partner at Wilson Sonsini Goodrich & Rosati, told MarketWatch. "It's not fly-by-night companies hoping beyond hope that there is a way to get out the door. The pipeline is so good that the best companies are at the front of the line."
One such company is Hospital Corporation of America (HCA) Holdings, which aims to raise $3.5 billion when it lists on the New York Stock Exchange (NYSE) next week.
HCA is the largest non-governmental hospital operator in the United States and a leading comprehensive, integrated provider of health care and related services.
Hospital companies have been in an upswing for the past six months, with four of the most commonly followed stocks up 49% on average in the last six months. Community Health Systems (NYSE: CYH) is up 43%, Health Management Association Inc. (HMA) is up 47%, Tenet Healthcare Corp. (NYSE: THC) 61%, and Universal Health Services Inc. (NYSE: UHS) is up 45%.
Still, the most fertile ground for IPOs has been the technology sector. The seven technology companies to go public in the first month and a half of the year raised a total of $700 million, according to Renaissance.
Nielsen Holdings NV (NYSE: NLSN) was the headliner, raising $1.75 billion in its listing.
Most all of the tech companies to go public this year – Nielson, Demand Media Inc. (NYSE: DMD), InterXion Holding N.V. (NYSE: INXN), BCD Semiconductor Manufacturing Limited (Nasdaq: BCDS), and NeoPhotonics Corporation (NYSE: NPTN) – are trading above their IPO prices.
"Investors want to play the big themes in technology, such as cloud computing data storage and security, and it is hard to get that exposure by owning big technology companies," Eric Mandl, global head of software and large-cap tech banking at UBS AG (NYSE: UBS) told the Financial Times.
Right now, no technology theme is hotter than social networking, and three big players are about to go public.
In the Pipeline
Though none of them have set a date, Groupon, LinkedIn Corp., and Skype Ltd. are among the tech heavyweights expected to list this year.
With so much buzz surrounding Facebook Inc. and Twitter Inc. – neither of which have announced any intention to go public – these companies are often overlooked. But these are three of the world's most unique and successful social networking companies.
And more importantly, they have demonstrated profitability, scores of potential and valuations that aren't quite as overblown as Facebook and Twitter.
Groupon, the deal-of-the-day site that spurned a $6 billion takeover offer from Google Inc. (Nasdaq: GOOG), may have the biggest offering this year. The company expects its debut to raise $15 billion or more. NeXtup figured a potential $40-per-share price for Groupon, based on an initial public offering of 165 million shares.
The Wall Street Journal recently cited a memo from Groupon Chief Executive Officer Andrew Mason as saying his company's revenue rose to $760 million in 2010 – a 20-fold increase from $33 million in 2009.
"The earth is super old – thousands of years, some say – and no one has ever done anything like this," Mason said in the memo to his employees. "You should all exude a borderline-annoying sense of pride in what you've achieved. You should be wearing a big, toothy grin – the kind that makes people want to punch you in the face. No one deserves to be as happy as you are right now."
Groupon offers its members discounts of up to 70% on local services, provided enough members sign up for any single offer. It then takes a commission of 30% to 50% from the merchants who provide the services.
The company grew to 50 million from 3 million users across 500 cities in 40 countries over the course of 2010.
LinkedIn, the social networking site for professionals, has more than 90 million users in 200 countries. The estimated value of the company is about $2 billion, following a $20 million investment from Tiger Global Management last July. It is seeking to raise another $175 million in its IPO.
LinkedIn's sales more than tripled from 2007 to 2009, led by increased revenue from advertising, premium accounts, and job listings. The company posted a profit of $1.85 million in the nine months through September 2010 and revenue doubled to $161.4 million. That compared with a net loss of $3.4 million and revenue of $80.8 million a year earlier.
Skype is set to have a comparable listing. The Internet calling service aims to raise $100 million in an IPO this fall. The company claims to have 27 million users online during its peak hours, up from 15 million a year ago.
The company's goal is to collect 1 billion users; analysts say that's achievable if more businesses adopt the technology.
Skype over the past several years has already built a loyal user base.
"As a result, businesses will give Skype a chance," Peter Fader, a marketing professor at the Wharton School of Business told Telemanagement. "The Skype name is already a verb [as in 'skyping' with someone] and can certainly go down the business-to-business path. That's where the money is."
Indeed, unlike the tech boom of the late 90s, Groupon, LinkedIn, and Skype have solid fundamentals and huge potential. And they're likely to keep the U.S. IPO market churning through 2011.
"I think the IPO market is as healthy now as I have seen it in 15 years, and that is because it is still very selective," Lise Buyer, principal of Class V Group in Silicon Valley, which guides private companies through the IPO process, told MarketWatch. "Companies have truly compelling stories, acceptable fundamentals and a truly strong management team."
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