Many Firms Line up for IPOs, but Market Mood Is Iffy
Some 161 companies are seeking to raise more than $56 billion through initial public offerings, according to Renaissance Capital, an I.P.O. research firm. That is the most companies in the I.P.O. pipelinesince 2000 and the largest pent-up dollar amount on record.
“We haven’t seen such a large overhang of supply in some time,” said Linda R. Killian, a principal at Renaissance. “The question is whether the market can absorb it all.”
The huge backlog underscores a grim fact: Two years after the financial crisis, the stock market remains fragile. While there has been a robust rally in bonds, with companies aggressively issuing debt to take advantage of low interest rates, the appetite for equity remains weak.
The ability of Wall Street bankers to execute these I.P.O.s through the end of the year will test the stock market’s health.
The I.P.O. bottleneck is partly a function of the extreme stock-market volatility over the last three years. The financial crisis largely froze the capital markets for 18 months and prevented companies from raising money.
But after a rally in stocks — from its March 2009 low through its peak in April 2010, the Standard & Poor’s 500-stock index rose approximately 78 percent — about 130 companies filed for initial public offerings in the first half of this year, according to Renaissance.
Then came events this spring that set the stock market back — the European debt crisis, the BP, oil spill and the so-called flash crash in May when the Dow Jones industrial average briefly nosedived nearly 1,000 points.
Skittish investors shunned equities and as a result, few companies have been able to complete their I.P.O.s.
“The stock market has effectively been in a recession since August 2007,” said David J. Goldschmidt, a lawyer at Skadden, Arps, Slate, Meagher & Flom who specializes in capital markets transactions. “And all this volatility and uncertainty makes it difficult to sell equity securities.”
The companies dominating the gummed-up pipeline today look very different than in 2000. Back then, a record 237 businesses were trying to raise $28.5 billion through I.P.O.s, according to Dealogic, a financial data provider.
That was at the apex of the dot-com boom, when money-bleeding start-ups like Webvan and Pets.com sought to exploit investors’ insatiable appetite for technology stocks. (That story did not have a happy ending.)
Today, many of the largest I.P.O.s on the shelf are large, established companies taken private during the buyout boom of 2005 to 2007. These businesses are now poised to return to the public markets. The list includes Toys “R” Us, Nielsen and the consulting firm Booz Allen. The Hospital Corporation of America, which says it hopes to raise $4.6 billion, is among the biggest deals in the backlog.
The largest is expected be General Motors, which is 61 percent owned by the United States government. The outcome of G.M.’s offering stands as perhaps the biggest question looming over the I.P.O. landscape. The deal is set to hit the market in the fall and is poised to raise an estimated $15 billion. That would make it the second-largest I.P.O. in United States history, after the $19.7 billion offering of Visa in 2008.
“This I.P.O. market isn’t like 2000, where companies needed to raise money for unproven drugs or whiz-bang technology,” said John A. Chirico, a senior capital markets executive at Citigroup. “Most of the companies in the pipeline today are proven businesses, and many have the financial flexibility to stay private.”
Still, private equity firms are eager to sell stock in their holdings. In some cases, the firms plan to use the proceeds to improve their companies’ balance sheets, paying down the huge amounts of debt they borrowed to go private. In other instances, the companies want to return money raised from the I.P.O. back to their private equity owners, who have largely been unable to bank profits over the last two years.
And in the case of a G.M. offering, the government is eager to sell down its stake.
Unclogging the I.P.O. pipeline would also help dozens of other private-equity-owned businesses that have explored tapping the public markets. In recent months, bankers have met with buyout firms about possible offerings for some of their biggest investments, including Freescale Semiconductor and Michaels Stores, according to people briefed on the discussions.
The few companies that have recently tried to go public amid the choppy markets have had underwhelming success. The pricing of new United States stock issues in 2010 has been the weakest in five years, according to Thomson Reuters data.
For instance, in July, NXP Semiconductors, a Dutch chip maker owned by Bain Capital and Kohlberg Kravis & Roberts since 2006, raised $476 million after cutting its offering by as much as 33 percent.
Rather than selling stock into an unreceptive market and risking a disappointing deal, a number of private equity firms are pursuing a “dual track strategy” — filing for I.P.O.s while simultaneously weighing offers from potential buyers amid a recovering mergers-and-acquisitions market.
Last week, Univar, a large chemicals distributor owned by the private equity firm CVC Capital Partners, withdrew its I.P.O. and instead sold half of its stake to the buyout shop Clayton, Dubilier & Rice.
There is some cause for optimism heading into the fall. A recent Citigroup survey of institutional investors — mutual funds, hedge funds and pension funds that account for the bulk of I.P.O. buyers — shows a build-up of large cash positions in their portfolios, a sign that they could be looking to buy stocks. Yet the same report says “there is meaningful cash on the sidelines, but little confidence.”
“I think investors want to put capital to work,” said Mr. Goldschmidt of Skadden Arps. “But I’m an optimist.”