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The IPO business: Buyers are in control

Traders on the floor of the New York Stock Exchange.
Photographer | CNBC
Traders on the floor of the New York Stock Exchange.

IPOs: buyers in control. It was a rough night for the IPO business. Of the seven offerings that priced, only two priced above the range (both software companies), four priced below, and one in the middle:

The big winner today was software analytics company New Relic (NEWR), which priced 5 million shares at $23, well above the $20 to $22 price talk, which was raised from $18 to $20 earlier in the week. They help customers have a better experience on websites. They were hired by healthcare.gov to fix problems consumers were having on the website.

The other big winner was database software firm HortonWorks (HDP), which runs the Hadoop system, priced 6.25 million shares at $16, well above the price talk of 6 million shares at $12 to $14. Though well known in the enterprise data space, they have never made money.

Workiva (WK), which is a cloud platform that helps companies with their SEC filings, raised 7.2 million shares at $14, the midpoint of the $13 to $15 price talk. Sounds pretty specialized, but they have $100 million in revenue.

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On the other hand, the field is littered with companies that had to cut prices to get the deals done:

1) Aircraft leasing company Avolon Holdings (AVOL) priced 13.6 million shares at $20, below the price talk of $21 to $23;

2) Reinsurer James River Group (JRVR) priced 11 million shares at $21, below the price talk of $22 to $24;

3) Powertrain component manufacturer Metaldyne Performance Group (MPG) priced 10 million shares at $15, below the price talk of 15.4 million shares at $18-$21. So instead of raising roughly $300 million at the midpoint, they raised $150 million.

4) Connecture (CNXR), which manages medicare.gov and many of the top health plans, raised 6.6 million shares at $8, more than the 5.8 million shares they were initially seeking to sell, but it was sold at $8, way below the price talk of $12 to $14. The simple way to look at this is that at the midpoint of the initial price talk ($13), they would have raised $75.4 million. They ended up raising $52.8 million.

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That is well sort of expectations by any measure.

Bottom line: buyers are in control. They are dictating the price. The main point is, they have to discount the deals to get them done. This is the end of the year: you do not want to postpone your IPO until mid-January. It's embarrassing, and you expose yourself to the risk that the market could be even worse then. Better to cut the price to get the deal done.

This is GOOD NEWS for the IPO business. It's good news for buyers. No one wants to price an IPO and then have it wither in the first week. That will get much more attention than cutting prices to get deals done.

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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