Why IPOs Are Reviving - But Not In Technology

What if Wall Street gave a party and tech wasn't invited?

Yeah, how weird would that be? Pretty strange, based on the history of the past 20 years. But get used to it.

There is an IPO boomlet forming. If all goes well - and, seriously, when was the last time that happened? - just humor us here, this could be quite a year for liquidity events. If all goes according to expectations, there may be as many IPOs this year as there were in - this may be a little scary - 2007. Yes, the year before the good times crashed and burned. The issue is not why the revival is finally starting to happen, but why so few tech companies are represented.

Part of the reason is, like a favorite TV cartoon show of that era, tech is All Growed Up. Investors are no longer overawed by the raw promise of innovations they barely understand but that sound beguiling. They've been burned too often: Groupon, Facebook (at least it's IPO), Zynga and all those Chinese startups that turned out to be nothing more than crooked accounting and a greedy gleam in the eye of those who thought they were cashing in on the Asian miracle.

The other part is that the world's love affair with the capital markets remains mostly a bittersweet memory, like being dumped by a high school flame. Many investors have refused to get back in. Burned once, twice cautious. The alliance of tech and finance made a lot of people some money, but it lost a bunch, as well. Tech is going to have to prove its bona fides now: no more fairy dust. Earnings, market share, believable projections. All those boring numbers that used to be de rigeur but were cast aside in the rush not to be considered someone who 'doesn't get it.'

Tech will certainly have its day again, but it will have to get there, as the saying goes, the old-fashioned way, by earning it. JL

Telis Demos and Matt Jarzemsky report in the Wall Street Journal:

Just 16% of new U.S. listings this year have been technology or Internet companies, according to Dealogic. By that measure, 2013 could be the second-worst showing since at least 1993. In 1999, at the height of the dot-com boom, 69% of all IPOs were tech-related stocks.

Initial public offerings from technology-related companies and booming U.S. stock markets usually go together--such as Priceline.com and 1999. Not this year.

The Dow Jones Industrial Average has climbed 15% since Jan. 1, even after declining 3% this month largely on jitters about corporate earnings and expectations that the Federal Reserve will scale back stimulus measures in the coming months. At the current pace, the number of IPOs in the U.S. could hit 200, the most since 2007.

There have been just 22 tech and Internet listings this year, raising $3.2 billion, the slowest annual pace in four years. In contrast, the overall market has produced 134 U.S. IPOs this year.

And one of the most-anticipated IPOs, from Alibaba Group Holding , could skip U.S. stock markets altogether.

Some money managers worry that, once the stock market is no longer the beneficiary of easy money from central banks, the dearth of tech IPOs will expose the fragility of this year's rally.

Recent history shows that broader-market rallies are usually accompanied by an IPO market that is heavy with technology companies. Only in one year since 1993 has the S&P 500 index risen by a double-digit percentage without tech companies making up more than 20% of the IPO market.

"Tech IPOs in particular require investors to have pretty strong faith in the future, because you're buying these things on the cusp," said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. "Robust appetite for tech IPOs is a fabulous indicator of investor enthusiasm."

The epic stock rally of the 1990s was driven in large part by investor enthusiasm over debuts such as Netscape Communications and Amazon.com . The market bounce that started in 2003 featured the initial public offering of Google in 2004. But technology and Internet companies are making up a much smaller share of IPOs than in past multiyear stock advances, attributable in part to Facebook Inc.'s disappointing IPO debut and to the fact that Silicon Valley is awash in private capital.

Technology stocks have risen this year but have lagged behind the broader market. The S&P 500 Information Technology index is up 11%, while the broader S&P 500 index is up 17%. Apple shares, which are down 6% year-to-date, have weighed on tech stocks.

Investors have been pulling money out of technology funds this year--$365 million has been withdrawn from U.S. mutual funds focused on tech stocks, according to Lipper. That is in contrast to the period leading up to Facebook 's IPO. From February to April 2012, before Facebook's debut that May, U.S. tech-stock mutual funds raked in $411 million in new investor money.

While the pace of tech IPOs has slowed, the performance of the stocks after their debut has been strong. Through Aug. 12, technology and Internet companies that had gone public this year had gained 64% on average from their offer prices, according to Dealogic.

A recent turnaround in Facebook stock could also help draw more IPOs back into the market. Its shares have rallied 52% this year and are now tracking back above their original IPO price of $38 a share.

That could have an impact on sentiment among retail investors. At the time, Facebook 's IPO had "brought people off the sidelines" who hadn't traded in months, said Steve Quirk , senior vice president at TD Ameritrade Holding Corp ., a discount retail brokerage based in Omaha, Neb. "There haven't really been any IPOs since that have given people a reason to be interested."

Fund managers also say that they learned many lessons about what kinds of Internet companies make sustainable investments in the aftermath of the 2011 and 2012 mini-wave of tech IPOs, which also included coupon-seller Groupon Inc., games-maker Zynga Inc ., and streaming-music service Pandora Media Inc . All three stocks had fallen below their initial price within six months of their debut, although Pandora and Groupon have traded above that level recently.

Companies learned that they may need to postpone going public until they have convinced investors of their unassailable scale. They have used private financing, which is abundant in Silicon Valley, to buy time to hone their strategies. This may mean a slower pace of IPOs, and that some companies never get to the finish line. But it could also herald better-performing deals over the longer term if companies are better prepared, some executives and investors say.

If "you have plenty of capital to grow your business, and every year you grow it there's less uncertainty, more predictability of revenue...why would you go public?" said Niraj Shah , chief executive of Wayfair, the Internet housewares retailer that operates websites including JossandMain.com and Wayfair.com .

Wayfair, based in Boston, raised $201 million in 2011 by selling private shares to institutional investors. Mr. Shah said an IPO remains a goal, but it isn't working on one right now.

More tech companies are raising money at billion-dollar valuations before they go public, according to figures compiled by Credit Suisse and data provider Pitchbook Data, based on public fundraising disclosures. The median value of the 15 largest private fundraisings--including a funding round completed by Twitter --was more than $1 billion for the first time in 2011.

"Because companies don't want to, or sometimes can't, go public at valuations below their last private round, it extends the runway before they can confidently tap the public," said Cully Davis, a managing director in equity capital markets at Credit Suisse .

High-profile companies are waiting in the wings.

Midasplayer International Holding, the company better known as King that is behind the smartphone game Candy Crush Saga, may go public as soon as November, people familiar with its thinking said. A spokesman declined to comment.

Twitter is weighing an IPO next year, people familiar with the company's plans said. CEO Dick Costolo said earlier this year that an IPO is "not what I spend my time thinking about or focusing on day to day."

Online cloud-data storage firm Box Inc. has said it is also preparing a possible 2014 IPO.