Don’t Blame Facebook for the IPO Drought
When it comes to going public these days, one event seems to have unhinged the entire deal pipeline.
No, it wasn’t the mismanaged Facebook initial public offering, although that brought waves of unfavorable publicity to the Nasdaq OMX and chief underwriter Morgan Stanley, and certainly added a chill to the summer IPO flow.
Rather the big event was the legislation known as JOBS — short for the almost unpronounceable "JumpStart Our Business Startups" Act — designed by politicians with little or no hard market experience to satisfy the popular misconception that the stock exchanges were somehow hindering the creation of small businesses.
Morningstar is one that credits this event with the IPO downturn. The firm says the JOBS Act allows companies like Broadstone add loads of shareholders yet still stay out of the public eye, thereby avoiding the rigorous and healthy attention that conventional exchange offerings receive.
More new companies seem to be choosing this quiet and lax way to launch instead of the disciplined approach of an exchange-centered process.
The numbers back up this claim. Morningstar reported 3.9 filings were made with the Securities and Exchange Commission each week in 2012 before the bill passed, but that average has sunk to 2.4 filings in the weeks since.
Not everybody agrees. “We haven’t had good IPO markets for some time,” says Tom Murphy of McDermott Will & Emery. “There is a lot of uncertainty,” such as the financial instability of the euro zone and other factors unrelated to the JOBS Act. To be sure, he said, “the Facebook issues were dramatically overplayed."
Murphy also argues that it’s far too early for the JOBS Act to have had an impact on the IPO market. “If you were thinking you weren’t going to do an IPO, you haven’t had time to act,” he said. “You need time for registration. It's just too quick.”
There is also a normal correlation between the equity market and the IPO market with a pattern of offering stoppages following down cycles. IPO Scoop looked at recent market pullbacks and the effect on the IPO calendar.
In 2011, the Nasdaq Composite Index dropped 18 percent between April 29 and Oct. 3. Only three deals priced during October, followed by 17 in November, when the broad market began to rally.
Jumping back to before the financial crisis, the Nasdaq Composite lost 29 percent of its value from July 20 to Oct. 8 in 1998. That year, five deals came to market in October, but November saw 19.
This year, the Nasdaq Composite is down 4.8 percent since April 5, when the JOBS Act was passed. As if on cue, IPOs dried up.
So, if Wall Street market lore holds true, that IPOs recover five to six weeks after a market downturn, then that puts us at mid-July for a return of the IPO market. Murphy, though, believes the timing will be terrible.
“Mid-July is a bad time. It’s hard to get anything done. All the bankers are gone on vacation. Planning for July is risky because a delay puts you in August,” he said. “We’ve become more international with everyone on vacation in August.”
Four companies are scheduled to go public next week, ending the offering stalemate. Fingers are crossed that there won’t be more postponements or withdrawals. As we’ve seen, just because they are on the calendar doesn’t mean they’ll actually get done.
It also looks like bankers agree with Murphy; it’s a small window here that they are trying to squeeze through. If they can’t pull the trigger on these deals quickly, then it looks like September will be the next likely month to sell these deals. As of June 20, there are 183 actives IPOs in the pipeline.
“September will be huge,” said Murphy.
So enjoy the laid-back IPO season of the summer. September will be a blur.
—By TheStreet.com’s Debra Borchardt
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