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Facebook Could Make or Break IPO Market

Facebook could make or break the fragile IPO market if it does not trade well once it goes public next week, analysts say.

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“If Facebook shows poor post-IPO trading or falls below its IPO price, it would be a disaster for the IPO market,” says Kathy Smith, a principal at Renaissance Capital.

Smith sees the mega Facebook deal as a “special case” and doesn’t expect it to change the dynamics of this year’s initial public offering market, which has had a very weak pricing environment.

She said investors have been making returns in part because they have benefited from the unusually high number of offerings that have been cut in price.

In fact, 47.1 percent of IPOs this year — the largest number in at least a decade — priced below their offer price, according to data from Renaissance Capital.

Facebook, which plans to go public on May 18, is widely expected to price well and is targeting a high valuation of $96 billion. The company has set the price range of $28 to $35 a share, and could raise as much as $13.5 billion.

“Hopefully the valuation of the company does not set unrealistic expectations for entrepreneurs, which could create a bubble and precede a possible collapse such as what was experience during the 2009 timeframe,” says Brian Hamilton, CEO of Sageworks, a firm that analyses private companies.

David Menlow, president of IPOFinancial.com, expects the Facebook IPO to do extremely well, but believes it won’t change the market’s reception of other technology firms looking to go public.

“It’s not going to be a case of ‘the tech is back’,” notes Menlow. “It is clear that substandard financials and fundamentals will be rejected by the market.”

Morningstar analyst James Krapfel says impact of a successful Facebook IPO is likely to be limited to temporary secondary effect on peer companies like Zynga and LinkedIn .

Facebook Stock Certificate. Click image to view larger.
Source: SEC
Facebook Stock Certificate. Click image to view larger.

However, “given the high expectations, less than spectacular Facebook debut could have negative repercussions for companies yet to IPO,” cautions Krapfel.

Smith agrees: “We need Facebook to do well. Investors are already reluctant to invest in newly public companies — choosing commodities and bonds instead of equities. Poor performance by Facebook will only add to their list of reasons.”

So far, the IPO Class of 2012 has delivered positive returns to investors. An average IPO returned 18.9 percent from its offer price versus 8.6 percent for the S&P 500 , according to Morningstar. But the returns are starting to melt away as trading conditions in the U.S. stock market weaken.

Moreover, more than one-third of this year’s IPO are already underwater, according to data from Dealogic. Among them, this year’s biggest listing to date — private equity firm TheCarlyle Group , which dropped below the IPO price Wednesday, a week after its market debut at $22 a share.

While the number of deals priced this year is up 11.9 percent versus a year ago, total proceeds raised are down 42.2 percent. The number of filings made with the SEC is down 58.4 percent, Renaissance Capital data shows.

Smith says the low number of filings can be explained by the so-called JOBS Actsigned into a law a month ago, which allows firms to confidentially file with the SEC and not to disclose anything about the company until 21 days before the road show.

Mark Heesen, president of the National Venture Capital Association, agrees. “We already are seeing interest in companies filing to go public on a confidential basis as well as increased excitement about employing the IPO as opposed to an acquisition,” he says.

Analysts believe the IPO activity in the second half of the year will be very much correlated to the direction of the equities market.

"Last year we saw the beginnings of a recovering IPO market only to be set back in August when the IPO market essentially closed as the convergence of the US budget impasse, Europe's financial situation, Arab Spring ramifications, and gas price increases all came to bear," says Heesen. " We remain cognizant that the issues above remain and we need to add the uncertain upcoming U.S. elections."

Menlow sees the market as “a bit more manageable.”

“Risks are not as prominent as in previous years” and market doesn’t react as violently to outside events, he notes.

Questions? Comments? Email us at marketinsider@cnbc.com and follow me on twitter @kfrayter

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