IPO market worst in decades

June 22, 2009
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Chances are the number of Initial Public Offerings filed and issued this year will be the fewest in the market's recent history — and not just domestically, but globally, as well.

Only 11 had been issued worldwide through the first half of June; nine were stateside IPOs. As a comparison, 108 companies went public across the globe during the first six months of last year.

"It really is nearly at historic lows. I think that's both a reflection of the economy and the capital market, probably more so the capital market. There have only been nine in 2009 and 43 in 2008, and there were over 200 in the prior four years. So the pace has fallen off more in 2009," said Jeff Lambert, principal of Lambert, Edwards & Associates, the area's largest investor-relations firm.

"The indicator of why 2009 is probably going to shape up as the worst year in certainly the last couple of decades is, if you look at the filings that have currently been issued and are out there, there isn't a pipeline of a lot of deals coming, and the timing of an IPO is four to six months." he said.

Lambert said he didn't expect IPO activity to pick up until next year because the market needs more capital, which could be coming next year. He said an IPO can happen today, but the valuation will be less than in previous years. And although there could be more filings in the fourth quarter this year, the issuances won't be done until next year due to the time lag between the filings and the sales.

"I really think you can almost write off 2009 as a poor IPO year," he said.

A West Michigan
IPO connection

One of nine U.S. companies that have gone public so far this year was Mead Johnson Nutrition, a maker and seller of pediatric nutritional products. The firm has its corporate office in Glenview, Ill., and a manufacturing plant in Zeeland at 725 E. Main Ave.

MJN went public with a share price of $24 in February and was selling for $31.21 a share on June 12. The Initial Public Offering recorded a total return of 30 percent.

The company had worldwide sales of nearly $2.9 billion last year and 5,300 employees. It was founded in 1905.

The recession of 2002, following the 2001 terrorist attacks, had a much smaller impact on the IPO market than the current one has had so far. In 2002, 98 IPOs were issued globally in the first six months after the previous September's attacks. Activity did slow in the second half of 2002, to 30. But both half-year numbers from that year are multiples of this year's six-month total, and the market also bottomed out in the month of September.

So why a steeper decline this year than seven years ago? The two recessions are different. The earlier one was purely economic, while the current one isn't.

"This is a capital-markets recession. So the actual supply of money is much lower, and that's one of the reasons why it's so much deeper. It's impacting the very companies that supply the capital," said Lambert.

When the market does get back on its fiscal feet, Lambert said observers would see IPOs coming from growth sectors such as health care and technology, because investors will continue to look for safer investments in familiar industries.

"That flight to safety includes going with what you know," he said.

Lambert felt the recent bankruptcy filing by General Motors Corp., once considered to be the safest investment on the planet, hasn't added to the financial apprehension that investors have had since the banks and AIG failed.

"That's what shakes the market," he said of GM, "but it began on the institutional side.

"There may be interest by individual investors, but what drives the IPO market is the institutional interests. With all the declines and redemptions they've had, there is not an appetite for new issues."

Lambert didn't think funds from the American Recovery and Reinvestment Act would have directly helped the IPO market. Some dollars, though, may have served as an IPO bridge to some extent, if the money had stabilized firms that were considering filings.

"But a lot of the IPO activity over the last decade really has not been driven as much by companies needing money as much as it has been by private equity and venture capital firms needing liquidity. As many as half the IPOs were driven by an investor wanting liquidity," he said.

"Another reason why there aren't as many IPOs is you want liquidity, but you don't want to do it at a discount. Some of what you have is a lot of private equity and other venture capital saying, 'I want to hold out and I'm not going to give up my liquidity until the market improves.' So there is a cyclical effect. The markets go down, the valuations go down, and people basically hang on to their private ownership with the hope of it getting better."

The scenario Lambert described makes the IPO market not much different than the housing market. Homes are selling for 20 to 25 percent less now than last year, and IPO pricings this year are down by a quarter from last year.

"Right now, it's a great time to be a buyer but not a great time to be a seller. So if you have to sell your house right now, you will, but you'll see the declines (in values)," he said. "If you have to go public you will, but you certainly wouldn't want to."

Slow go for IPOs

The number of Initial Public Offerings for the first half of this year was down following the crash of the financial market last year. Even the recession that followed the 2001 terrorist attacks didn’t negatively affect the IPO market as drastically as has the derivative and credit default swap fiasco that surfaced from the sub-prime mortgage crisis.

The worldwide number of IPOs from 2001 to June 2009:

First Quarter
Second Quarter
Third Quarter
Fourth Quarter













*Denotes through June 10, 2009

Source: Renaissance Capital LLC, www.renaissancecapital.com, June 2009

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