Public Offerings Up This Year

June 25, 2007
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GRAND RAPIDS — Filings for Initial Public Offerings have been up this year by 35 percent from last year. Nationwide, 104 companies had filed by mid-June. Over the same period last year, 75 had filed.

But one local expert doesn’t think the IPO surge will continue for the rest of the year. Jeff Lambert, president and managing partner of investor relations firm Lambert, Edwards & Associates, said the larger number of filings this year was due to a demand that had been building for a while, and to a thing called timing.

“The last couple of years have been slow, so I think a lot of this has to do with some folks moving into the market where the IPOs have been pulled off the shelf. I think that is one factor,” said Lambert of the demand.

“I think the other factor is, there has been a lot of private equity and hedge fund activity over the last three to five years, and a typical timeframe for a private equity firm to get liquidity in their ownership is in that three-to-five-year time horizon. So a lot of those deals that were done five years ago are now maturing to an IPO stage,” he added.

Renaissance Capital, which tracks IPO filings and pricings, reported that 76 percent of the filings over the last 12 months had come from five industries. Businesses in the health care field accounted for nearly 20 percent of those filings, followed by financial firms (17 percent), energy companies (17 percent), technology firms (14 percent), and communications companies (8 percent).

While filings are up, research coverage of IPOs is down. The Securities Exchange Commission extended the “quiet period restriction” on Wall Street research coverage of IPOs last July because of the scandal involving Worldcom. The result is that new offerings lack information that investors rely on, and analysts have claimed that the SEC action has led to more instances of volatile trading by new investors.

“The SEC is trying to go after what is called the soft dollar payments, and that really is research and brokerage firms getting paid through trading fees from preferential trading volume going through them by their clients. The SEC is trying to cut down on that, which is forcing more research firms to either cut back on their research or eliminate it all together,” said Lambert.

Lambert pointed out that the most recent quiet-period casualty came a few weeks ago when Prudential closed its brokerage operation. A  research consortium proposed by the New York State Attorney General’s office cut research by half for a while. Lambert, though, said the industry has recovered somewhat from that.

“But the other factor is that a lot of the good sell-side people are being recruited now by the buy side, which includes both the portfolio managers, like a Fidelity or a Putnam, as well as hedge funds,” he said.

Lambert said the traditional IPO model has transformed over the past few years. The buying market isn’t being dominated by the individual investor or mutual funds any more. Today’s buyers tend to be hedge funds and big corporate pension plans, and growth in hedge funds has changed the research function.

“What they’re doing is in-sourcing their research function. So instead of relying on Smith-Barney or a Merrill Lynch to do their research, they’re simply hiring the analysts themselves and doing the research in-house,” said Lambert.

Industry consultant Integrity Research Associates reported that the buy-side would be spending $4.86 billion by 2009 on internal research, double the $2.24 billion spent in 2004. At the same time, Integrity said spending on sell-side research would drop from $5.4 billion in 2004 to $3.9 billion in 2009. Integrity also reported that independent research providers would spend $3.1 billion by 2009, up from the nearly $1.5 billion they spent in 2004.

Some public firms, however, have done the opposite and gone private. Accounting changes, such as the controversial Sarbanes-Oxley Act, have been cited by some for the reversals, and Lambert said there was some truth to that.

Another factor, though, has played a bigger role in why businesses have left the public realm. For most, Lambert said the cost of being public has made many firms switch.

“Sarbanes-Oxley has been just one issue that has been layered on top of everything else, but it’s the overall cost — both the time costs as well as the hard costs for what it takes for small and mid-sized companies to stay public. So it has less to do with that single issue. It is the piling on of regulations and time that it takes to be a public company,” he said.

There were 198 IPOs in 2006. For the market to sustain the 35 percent surge of public offerings it has seen so far this year for the rest of the year, 2007 will have to end with 267 IPOs, and Lambert didn’t believe that number will be reached.

“I don’t think so. I think IPOs is a very cyclical business. I think it’s going to depend on how the economy trends. Right now, most folks are saying it’s going to be stable, which would say the IPO market will be stronger than last year,” he said.

“But I think sustaining a 30 percent increase would be tough to match. So I would look at it more on an annual basis — that if it’s up 35 percent for the first quarter, that’s going to flatten out for the rest of the year just based on the overall activity of the market.”    

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