Whatever Goes Up...: The Boom and Crash Cycle of IPOs

Whatever happened to the LinkedIn-inspired IPO boom? The answer can probably be summed up in two words: trust and jobs. With the global economy still stalled and US job creation on the brink of slipping back into negative territory (net job destruction, in other words) the market for investment in future-oriented ideas has withered. Ideological calls for government retrenchment rather than investment may well be this century's version of the Smoot-Hawley tariff but even wealthy business people are afraid to challenge the reigning orthodoxy. Without jobs or increasing income, the consumers for the new products and services - whether businesses or individuals - simply arent robust enough support existing concepts, let alone new ones.

The second and equally important throttle is lack of trust. The collapse of the financial markets in 2007-8, the failure of meaningful reform, dominance of algorythmic trading which eliminated the level playing field for investors and the exponential increase in Chinese business accounting scandals has chilled interest investment interest.

IPOs are the monetization of innovation. They fund the future. But with the economy so worrisome and belief in markets so weakened, entrepreneurs and their backers may have to seek alternative exit strategies for their dreams. JL

Floyd Norris reports in the New York Times:

"THE global market for initial public offerings of stock, which was hot in late 2010, has cooled. In just a few months, the market has gone from raising record amounts of money to reaching a 10-year high in the number of proposed offerings withdrawn because there was no market.

During this year’s second quarter, 98 offerings — which had been projected to raise $21 billion — were withdrawn, according to calculations by Dealogic. The number of canceled offerings was the highest since 129 proposed offerings were canceled in the fourth quarter of 2000, as it became clear that the technology bubble had burst.
The recent boom in initial public offerings was spread much wider than the one that ended in 2000. The earlier boom was concentrated in the United States, but the latest included many more companies from booming developing markets, particularly in China.

In the fourth quarter of 1999, the total amount raised by I.P.O.’s hit $66.1 billion, which was then the highest level ever. More than three-quarters of that was raised in the American market and most of it was for technology companies. In the final quarter of 2010, $127 billion was raised and less than one-quarter of that was raised by offerings in the United States.

In the latest quarter, the total raised was about half the level of the fourth quarter of 2010, although the decline in the number of completed offerings, to 406 from 516, was not as sharp.

As can be seen from the accompanying graphic, the market for initial public offerings virtually collapsed in 2002 and 2003, but then began to recover as stock markets rose and many countries reported strong growth. Thanks to strong volumes of foreign offerings, the I.P.O. market had become strong before the financial crisis killed the market in 2008 and 2009.

The volume of withdrawn offerings provides a clear indication of rapid changes in markets. Those are deals that underwriters thought they could sell. They went to the expense of preparing offering documents but then were unable to sell, at least at prices acceptable to the companies.

The failed offerings cover the spectrum, both geographically and in the nature of the business. In June, three proposed I.P.O.’s that had been expected to yield more than $1 billion each were withdrawn. One was a Hong Kong company that mines iron ore in Australia, another a French company that makes glass containers and the third an Indian company that builds and leases communications towers for cellular telephone service providers.

Unlike the collapse of the market in 2000, the latest decline does not follow a widespread collapse in the prices of previously hot new offerings. During the final three months of 2010, when the total amount raised by new offerings set a record, Dealogic counted nine offerings that doubled in price on the first day of trading. This week, all of those stocks were still trading above the offering price, although only two — Youku.com, a Chinese Internet television company, and TPK Holding, a Taiwanese maker of screens for smartphones and other devices — traded for more than they did on the first day.