Big Deals Signal Demand for IPOs
With multibillion-dollar deals expected this week from Citigroup Inc.’s Travelers insurance unit and Nestle’s eye-care giant Alcon, the market for initial public stock offerings shows signs of snapping out of an 18-month rut.
Companies have raised just $2.9billion so far this year by selling new stock to the public, compared with $4.5 billion in the same period a year earlier, based on data from research Web site IPO.com. But analysts expect this week’s four IPOs to bring in $6.1billion, thanks mainly to two mega-deals: Travelers Property Casualty Corp. is expected to raise $3.7 billion--making it one of the 10 biggest offerings ever--while the Alcon deal is estimated at $2.3billion.
The pace of new filings has picked up sharply in recent weeks as the stock market and the economy have shown signs of stability. Thirty-six firms have filed to go public this year, up from 23 in the same period last year, according to IPO.com.
“The IPO market needs a strong equity market and a healthy economy to thrive,” said Marc Baum, chief executive of New York-based IPO Group Inc., which runs IPO.com. “Investors are beginning to feel more comfortable about the way things are going.”
Most of this year’s IPOs have fared reasonably well with investors. But the speculative frenzy that led to huge first-day price run-ups in 1999 and early 2000--before the bear market began--shows no sign of returning. That’s a good thing, analysts say: Underwriters and investors are more choosy and prudent these days, so better-quality deals are getting done.
“In 1999 and 2000, we lived through this blip where all kinds of companies that shouldn’t have gone public took advantage of the stock market bubble,” Baum said. “Now there’s a much bigger gantlet that companies must run through before making their appearance on the public stage.”
This year, only six companies have been yanked from the calendar of upcoming deals, versus 62 by this time in 2001, a further indication that investor demand for IPOs is firming, Baum said.
He noted that three deals shelved in 2000 or 2001--Printcafe Software Inc., medical supplier Kyphon Inc., and DVD lender Netflix Inc.--are back on the calendar for this spring.
The warm reception investors gave online payment firm PayPal Inc. a month ago also has given the IPO market a confidence boost, Baum said. PayPal surged more than 50% in its trading debut, and although the stock has since dipped, it closed Friday at $17.87, up 37.5% from its offer price.
Internet-related IPOs were the darlings of the late 1990s bull market, when many rocketed more than 100% in their trading debuts as investors clamored for anything with dot-com in its name. But the sector has been ice-cold for the last two years. PayPal was the first Net-related IPO in nearly a year.
Though PayPal is unprofitable--an echo of the bubble era--it’s also a “real business in a real area that needs to be served,” and its losses have been narrowing, Baum said.
But the most encouraging trend, he said, may be the array of business sectors represented by IPOs these days.
Anteon International Corp., which had a solid trading debut last week with a 16.1% gain, is one of three defense-related companies to have gone public this year. Meanwhile, several airlines, including JetBlue Airways Corp. and the regional subsidiaries of Continental Airlines Inc. and Northwest Airlines Corp., have filed for IPOs.
“We’re beginning to see a broad range of stuff, always a sign of a healthy IPO market,” Baum said. “Would anyone have thought we’d be seeing airline IPOs six months after Sept. 11?”
Although the Travelers and Alcon deals are likely to be huge, Baum said the performance of those stocks is unlikely to yield clues about the future strength of the IPO market.
“There’s always an appetite for high-quality names, especially now,” he said, noting that established companies such as Kraft Foods Inc. have been one of the IPO market’s few bright spots since the tech bubble burst. Kraft’s shares are up 21.5% since its IPO in June.
Other blue-chip companies considering major IPOs include General Electric Co., according to a report Friday in the Wall Street Journal. GE might sell a 20% stake in its property and casualty reinsurance unit, Employers Reinsurance Corp., to the public and spin off the rest to investors, the report said, although the conglomerate declined to comment.
