Uncertainty Clouds 2012 IPO Market Outlook

There is no shortage of companies waiting to go public in 2012, but whether they succeed is highly uncertain and will depend on the health of the global economy and broader markets, say analysts.

Wall Street sign
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Wall Street sign

"The uncertainty in how the IPO market will perform next year is more pronounced today than it has been in years, " says Mark Heesen, president of the National Venture Capital Association.

Global economic jitters, as well as stock market volatility put a damper on the IPO activity in 2011, creating the largest backlog of deals in over a decade.

There are currently over 200 companies in the pipeline, including highly anticipated offerings fromFacebook, business review site Yelp, leading toy retailer Toys"R"Us, and private equity giant Carlyle Group.

"Today you have a convergence of factors simply not seen in the past that combined are making investors unwary of new public issues: European debt situation, U.S. budget problems, the aftermath of the Arab Spring, the unpredictable 2012 presidential and congressional elections, and calls for major changes in the U.S. tax code," Heesen says.

“While we remain hopeful that 2012 will be a good year for IPOs, we also understand that the ability to move forward will not be totally in the control of entrepreneurs,” adds Heesen.

In fact, the amount of deals waiting in the current pipeline total a stunning $30 billion, which interestingly is about the same value as all proceeds raised so far in 2011, according to Scott Gehsmann, transaction services partner at PricewaterhouseCoopers.

“The hope for a stronger IPO market in 2012 is via sheer volume in the number of firms waiting to go to market,” says Mike Lubansky, senior financial analyst at Sageworks.

But weary investors may be reluctant to chase new opportunities given dismal performance by the IPO Class of 2011, including big name firms like Groupon, Pandora and LinkedIn.

“While some of these IPOs achieved successful valuations, recent aftermarket returns have looked somewhat abysmal, and that’s not a confidence builder amid various economic uncertainties,” Lubansky told CNBC.

After seeing big pops on the first trading day, Groupon and Pandora are now trading below their IPO price, while LinkedIn came down 28 percent aftermarket.

Moreover, some analysts are skeptical that gaming site Zynga, which is expected to price its IPO next week, will be able to stay above its offering price for long. The company seeks to raise $925 million, becoming the largest internet IPO since Google .

According to data-provider Dealogic, 79 of 119 this year’s IPOs, or 66 percent, are currently underwater.

Many analysts believe hot web-based IPOs of 2012 such as Facebook and Yelp may also disappoint investors. They are unconvinced of proposed valuations and viability of their businesses.

Mark Zuckerberg
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Mark Zuckerberg

“Both Facebook and Yelp should pop the first day just like all the other internet stocks this year, and then trade down,’” says Francis Gaskins, president of research firm IPO Desktop. “They are better suited for traders than long-term investors.”

Lubansky believes “the lesser anticipated IPOs could hold stronger promise as the market may see them as having better fundamentals”.

Among other deals investors will be watching for next year is the possible $800 million IPO from Toys"R" Us, which has been on the shelf since May 2010—when the company first filed documents with the SEC.

The company submitted an IPO amendment in June of this year, but it remains unclear if it will actually proceed with the offering in 2012.

Another potential deal next year may come from the third-largest U.S. exchange, BATS Global Markets, which has filed to raise up to $100 million in an initial public offering.

“BATS is in the formerly hot exchange trading market business. However, the bloom is off their rose, based on poor performance the first half of 2011,” says Gaskins. Company’s profit dropped 54 percent below prior-year levels as trading fees slimmed and expenses grew.

Investors may also get a chance to own a piece of the Empire State Building. Malkin Holdings, which controls the iconic skyscraper, said that it has embarked on a course of action that could result in a public real estate investment trust (REIT).

“The REIT planned as an IPO by the Malkin family provides a different kind of IPO from the stream of 'new economy' companies like Facebook,” says Lubansky. “It has a long history of stable cash flows and is likely to not have an inflated valuation like some of the new economy IPOs, which may make it a more attractive long-term investment.”

Other possible deals next year include an IPO from Carlyle Group, which is reportedly looking to raise up to $1 billion, as well as IPOs from travel website Kayak, Spanish language television network Univision, luxury shopping website The Gilt Groupe, and furnishing retailer Restoration Hardware.

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