Don't Let the Active IPO Market Fool You

Although last week was the most active for the initial public offering (IPO) market since 2010, don't expect it to be the start of a sustained wave of IPOs and a rally among volatile U.S. stocks.

Encouraged by Groupon Inc.'s (NYSE: GRPN) successful IPO Nov. 5 as well as the October rebound in the stock markets, eight stocks went public last week. They include such well-known names as Angie's List Inc. (Nasdaq: ANGI) and Delphi Automotive PLC (NYSE: DLPH).

With so many companies in the pipeline to go public - 179, according to Dealogic - it didn't take much to incite a stampede to market.

"When underwriters see a window like this, whether really open or not, they just stuff the IPO channel," Scott Sweet of research firm IPO Boutique told Reuters.

Companies also know that they only have a few weeks before the end of the year to launch an IPO, with the market essentially dormant from mid-December to mid-January. And by then, conditions could again turn too negative for comfort.

Many companies no doubt are tired of waiting on the sidelines. While the IPO market was thriving early in the year - 44 companies went public in the second quarter - activity slowed dramatically in the second half of the year. Companies were dissuaded by the raft of bad news over the summer, from the debt ceiling crisis and worries of a double dip recession in the United States to concern over the possibility that Greece would default on its sovereign debt.

After an especially volatile August, not a single IPO launched in September. That kept the number of companies going public in the third quarter to just 18, and even with last week's burst the current quarter's total stands at just 16.

Some think the sudden surge in the IPO market may signal a turnaround for stocks in general, or at least for IPOs, but many of the summer's concerns continue to hang over the markets.

"It's too early to tell which position we're in," said Money Morning Capital Waves Strategist Shah Gilani. "We could be at the starting gate for a stronger, more robust market ahead, which would be good for IPOs. Or, we just as easily could be seeing a grab for cash before the market hits the fan."

What the launch of so many IPOs in the same week gives investors is a few clues about the health of the markets - and a look under the surface shows all is not well.

Gauging the IPO Market

Even though last week saw a flurry of IPO activity, some companies are still holding off.
Bluestem Bands and WhiteSmoke are just two that had intended to go public last week or this week and instead postponed their offerings.

Also, five of last week's eight IPOs priced significantly at the low end, or below, their expected range. Of the eight that did launch, half fell on their debuts and one, Manning & Napier Inc. (NYSE: MN), was flat.

Clovis Oncology Inc. (Nasdaq: CLVS) fell about 3% in its debut, where it remains; Delphi slipped 4.5%, and is currently down about 10% from its offer price; Intermolecular Inc. (Nasdaq: IMI) dropped 5%, and has inched up only marginally since; and Digital Domain Media Group (NYSE: DDMG) fell almost 16% on its first day, and is still down 14.8% from its offer price.

"If I'm a banker, I'm not looking to follow those events," Thomas Conaghan, a partner at the law firm of McDermott Will & Emery who represents companies doing IPOs, told MarketWatch. "There is so much sensitivity now, and another deal's bad fortune leaves a bad taste in the market for further new issuance. Everyone wants to be pricing in a good environment, and a good environment is when every other IPO is trading up."

The IPOs that did trade up were: Angie's List, which rose about 25% on its first day; InvenSense Inc. (Nasdaq: INVN) that rose 37.3% in its debut, and now is up about 40% over its offer price; and Mattress Firm Holding Corp (NYSE: MFRM), which climbed 15.8%.

A ninth stock that launched the previous week, data security firm Imperva Inc. (NYSE: IMPV), rose 33% in its debut and is currently up 48% over its offer price.

"It is unsteady and volatile and hit or miss," Rick Kline, a partner with Goodwin Procter in Menlo Park, CA, told MarketWatch. "Companies like Imperva and Angie's List did terrifically well, [but at the same time] you are seeing some pricing below the range."

Forging Ahead

Despite the volatility, a few companies will forge ahead with their IPOs in the coming weeks, most notably social gaming company Zynga Inc. this Friday. Other companies that have filed recently for IPOs are Yelp Inc. and Toys R Us. Caesar's Entertainment Corp., which had postponed its IPO a year ago, said it plans to raise up to $50 million in an offering.

Caesar's typifies the unsteady IPO market - last November the company had plans to raise $532 million.

But with the Eurozone debt crisis and the failure of the congressional super committee to develop a plan to reduce the nation's debt, many see the picture for the IPO market getting cloudier, not clearer.

"I'm a little less optimistic than I was a week ago," Michael Kaplan, a partner at the law firm of Davis Polk & Wardwell LLP, where he co-heads the global capital markets group, told MarketWatch. "There are still a number of deals people are talking about bringing, but the market was down last week and it's down again today. People will be thinking, why should I go out if the market continues this way?"

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