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After LinkedIn: IPO Boom Likely Despite Volatile Market

Karina Frayter, CNBC Markets Producer
Thursday, 19 May 2011 | 11:05 AM ET

Recent stock market volatility is unlikely to derail the recovery of the initial public offering (IPO) market, which boasts the biggest pipeline in 11 years, experts say.

Traders at the New York Stock Exchange anticipate LinkedIn's IPO.
CNBC.com
Traders at the New York Stock Exchange anticipate LinkedIn's IPO.

“There are too many fundamentally high-quality companies in the pipeline—we haven’t seen this in years—and any affects of equity market volatility will be short-lived”, says Paul Bard, research director of IPO research and investment firm Renaissance Capital.

There are currently 175 companies waiting in the IPO pipeline, the largest amount since 2000, representing potential $40 billion in proceeds, according to Renaissance Capital. So far this year, 62 companies went public and 124 companies filed for an IPO, a 20 percent increase from last year.

Wednesday’s pricing of the highly-anticipated LinkedIn IPO at $45 is likely to spike activity in internet companies. The social networking site for professionals priced at the high end of the range, which was raised by 30 percent from its original level. The stock doubled in the first few minutes of trading Thursday.

IPOs on the Rise
A number of companies are going public. Discussing whether this is an indication of positive economic growth, with James Chanos, Kynikos Associates president/founder.

“LinkedIn may be a tipping point for many that are watching on the sidelines”, says Bard. “This type of valuation may persuade many to take advantage of the momentum.” But not everyone will be met with the same demand, Bard warns. “Investors are selective.”

Peter Falvey, a Managing Director at Morgan Keegan, agrees: “(The) IPO market is very much a momentum market. LinkedIn should have positive impact on tech equity market”.

“Clearly, there is a strong interest from investors in digital media and e-commerce companies like Facebook, Twitter, Groupon and Zynga, as well as a host of smaller, fast growing companies. Each of them will execute very well received IPOs,” says Falvey.

The next big Internet IPO story will be Yandex, Russia's largest online search engine. It is set to raise $1.1 billion in a deal pricing next week.

“Yandex is a compelling offering”, says Bard. “It’s first direct opportunity for U.S. investors to play Russian internet market, and that can be a powerful driver of demand.”

Investor demand for Yandex shares has reportedly been so high that the company may finish taking orders earlier than scheduled. The company is expected to trade on Nasdaq under the symbol YNDX.

"The IPO pipeline is as strong as it has been in years ... partially because the challenging IPO market in the last three years translates into a large supply of more mature companies that should do well after executing an IPO." -Morgan Keegan, Peter Falvey

Among other deals that are expected to happen as early as this summer is vacation-rental site HomeAway, which filed for an IPO earlier this year with hopes to sell as much as $230 million worth of shares, as well as online radio company Pandora Mediaand travel website Kayak.

But upcoming IPO offerings are not limited to the internet sector. “We expect steady strong performance from companies in healthcare, energy, including renewable energy, and financial services”, says Henri Leveque, US Capital Markets leader with PwC Transaction Services.

The activity is also global. Commodities giant Glencore made its debut in London Thursday, becoming the U.K.’s largest IPO ever.

According to Renaissance Capital, there will be a total of 20 deals priced in May, raising a total $8.1 billion. Freescale Semiconductor , a leader in embedded processing semiconductors, will price in the middle of next week with hopes to raise over $1 billion. Other IPOs scheduled to price before month end are Spirit Airlines, The Active Network, Lone Pine Resources, Sabre Industries, Nobao Renewable Energy, and Solazyme.

But while stock market volatility is not expected to stop the deal flow, it may put downward pressure on prices. “Volatility will most likely cause lower quality companies to be more flexible with their pricing”, says Paul Bard of Renaissance Capital.

Peter Falvey of Morgan Keegan expects increased volatility in the equity market entering the summer, and “if it lasts through the third quarter, we may see material impact on the IPO market.”

The good news—so far this year, investors have been making money in IPOs. The average IPO has returned 9.3 percent from its offer price, according to Renaissance Capital. The aftermarket performance is flat at -0.4 percent, with underperforming Chinese companies dragging down the numbers.

“The IPO pipeline is as strong as it has been in years”, says Falvey, “partially because the challenging IPO market in the last three years translates into a large supply of more mature companies that should do well after executing an IPO”.

Henri Leveque of PwC notes that there’s a strong correlation between preparedness, solid business model and post IPO performance. “Preparedness is key. Companies that prepare diligently are higher on the performance spectrum.”

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