A record number of initial public offerings have been pulled this year as private companies around the world feared it was too risky to raise capital in such a volatile market.
A total of 215 IPOs have been withdrawn or postponed so far in 2011, surpassing the 214 that were yanked in the terrifying months preceding the Lehman Brothers collapse at the end of 2008, according to Dealogic figures released Thursday.
Private companies have left a record $44.1 billion in capital on the table, according to the deal data firm, on concern it could be cut in half before their eyes.
“Nobody wants to IPO into this fiasco of a market,” said Alec Levine, an equity derivatives strategist at Newedge Group. “There’s just massive liquidity risk. It would be great if you IPO'd the last 2 days, but awful if you IPO'd the previous 2 days—and so on.”
Stocks rallied Thursday as the ECB coordinated with other global central banks to lend to troubled European institutions saddled with Greek and other troubled debt. The equity market has gone through an unprecedented period of volatility since the start of August as it grinds lower on fears of a second global credit crisis.
Facebook, Zynga, Groupon and the like have either had their potential valuations reduced by the current market conditions or have chosen to raise money in private markets through venture capitalists.
“There’s fear of having their stocks hit, which may inhibit them from raising even more financing in the medium term” said Brian Sozzi, an equity research analyst with Wall Street Strategies. “If you are a fresh company to the public markets when Europe is driving the trade, it's not a recipe for a 50 percent run in the stock price over 6 months time.”
The FTSE Renaissance IPO Index is down more than 15 percent in three months, led by declines in social-media name Linked-In and real-estate web site Zillow .
“Investors will err to the low side re IPO valuations right now given market conditions,” said Adam Muller of hedge fund Chester Hill Capital. “The window that produced Zip Car, Pandora, etc. is closed.”
But some market observers believe there are bigger structural flaws with the U.S. markets and exchanges that make it not worth it for companies to go public. They cite everything from the laser focus on quarterly results to the takeover of high frequency trading to deficient regulation. Computer trading makes up 70 percent of the daily volume on U.S. exchanges, according to estimates from several analysts.
“It is because the reach of institutional sales has been eroded with the commission and spread structure of trading,” said David Weild with Capital Markets Advisory Partners. “Wall Street has been forced to focus its coverage on the top 100 institutions which dominate the commission pie. More than 3000 other institutions are largely ignored yet they represent about two-thirds of the market for sub-$2 billion equity market value stocks.”
The number of companies listed on the NASDAQ, NYSE and NYSE AMEX has fallen by 45 percent since 1997, according to Weild, who has been trying to use this data as a wake-up call to Congress to preserve the country's lead in the world as the best capitalist marketplace.
Facebook, the most-anticipated IPO right now, is quite content to stay private for at least another year, according to Roger McNamee, co-founder of Elevation Partners and a large investor in Facebook.
In July, even before the start of the market turmoil, McNamee said that a private venture capital market based on “private negotiations involving informed players” is flourishing because of the failure of stock market exchanges. Nasdaq and the NYSE are no longer about “capital formation” but making revenue on trading volume, said McNamee at the time, who also founded the private equity fund Silver Lake Partners. “Until the exchanges get back to focusing on capital formation, the pressure to go public won’t be there.”
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