More Companies Go Public As Economy, Stocks Recover
Special to CNBC.com
A lot of start-up companies are hoping to become the next ZipCar, which soared 56 percent on April 14, the day it went public.
The number of companies filing initial public offerings with the Securities and Exchange Commissionexploded in April, climbing to 41.
In the 10 months before March, the number of IPO filings hovered in the 20s, according to Dealogic, a financial data firm.
Then in March, the number ticked up to 35, Dealogic figures shows. The last month IPO filings exceeded 40 was August 2007, when there were 51, the firm said.
“It’s tracking to be one of the strongest years in many years,” says Bill Buhr, IPO analyst at Morningstar, the investment research firm.
A big reason for the uptick is the surging equity markets, which through April hit multi-year highs, Buhr said. The Russell 2000 small-cap index , in fact, soared to an all-time high of 865.27 on the last day of the month.
“Firms looking to go public and the owners—private equity firms and venture capitalists—really look for the best environment to do so,” he added.
IPO filings tend to lag an economic recovery, Buhr said, which is why the docket is getting full now after analysts became more confident late last year that the economy was strengthening.
Another reason filings are on the rise: many companies that have priced IPOs have been able to so at or above their price target, like ZipCar. “So investors are just gobbling up these companies,” he said.
Of 15 companies that have priced IPOs since April 14, only two were priced below expectations, according to data from Signal Hill Capital, an investment firm.
Another good example is Renren , the Chinese social media company, which priced at the high end of expectationsWednesday before the market opened, and then immediately skyrocketed more than 30 percent.
Then there's Sagent Pharmaceuticals , one of the first biotech companies to receive “healthy pricing” in some time, and not suffer a cut in deal size, Buhr said.
What that means is “even the more speculative deals are getting gobbled up,” he said.
The fact that IPO filings are on the rise is a good sign for the economy, particularly if the filings begin to stabilize above 30 a month, says Doug Godine, head of institutional sales and trading at Signal Hill Capital.
That’s because a robust IPO market means small companies are finding a market for their products, and are adding jobs, Godine says.
“There’s no better engine for growth in our economy than new-company generation,” he adds.
Companies go public instead of continuing as private enterprises to raise capital, to return cash to founding shareholders, venture capital investors and others, and to have a “currency” for making acquisitions, says Jay Ritter, a finance professor at the University of Florida.
“Another company does not like to accept stock in a private company if it is being acquired, whereas the shareholders of the target can see what the market value of the stock that they are receiving is, and can sell the stock if they want to," Ritter says.
The danger for companies hitting the market now is that stocks may well turn lower, as the market proved on Wednesday.
“I don’t think that the stock market is obviously overheated,” Ritter says. “But the upside potential is getting increasingly more limited.”