Forget Going Public, US Firms Want Just Want To Be Bought

In an economy increasingly insistent upon certainty, the capital markets are considered too risky. The assurance of a done deal by merger or acquisition is growing in favor over the once iconic IPO route.

It is not yet clear whether this signals a dramatic change in the risk profile of entrepreneurs, a lack of confidence in the future - or merely pressure from investors who, themselves, are facing uncomfortable levels of uncertainty. JL

Telis Demos and Corrie Driebusch report in the Wall Street Journal:

Merger-and-acquisition volumes are surging as firms seek to build scale and boost earnings in a sluggish economic environment. Volatility, which is typically bad for IPOs, is the result of higher-than-average stock valuations. Many IPO candidates are getting better offers from potential acquirers, including strategic rivals and financial firms.
U.S. companies are dropping initial public offerings and selling themselves at the highest rate in three years. This underscores the gap between volatile financial markets and a booming merger business.
While merger-and-acquisition volumes are surging as firms seek to build scale and boost earnings in a sluggish economic environment, investors broadly expect markets to be volatile for a host of reasons. This volatility, which is typically bad for IPOs, is the result of a likely Federal Reserve rate increase next month, higher-than-average stock valuations and worries about terrorism and other so-called geopolitical risks.
As a result, many IPO candidates are getting better offers from potential acquirers, including strategic rivals and financial firms.
All told, the dollar volume of U.S. IPOs this year has dropped 63% from the total in 2014 to $36 billion. At the same time, more than $2.3 trillion worth of merger and acquisition deals have been announced this year, a record pace that is up 46% from the total volume of 2014.
“When company owners sell, they take all the market risk off the table versus an IPO. That’s very compelling right now,” said Pete Lyon, co-head of Americas investment banking services at Goldman Sachs Group Inc.
At least 18 companies have stopped pursuing filed U.S. IPOs this year because they were being acquired, according to a Wall Street Journal analysis of Dealogic figures. That amounts to about 10% of companies that filed for IPOs and either went public or sold themselves this year.
That’s the highest share since 2012 and nearly double the rate in 2014, when the most offerings since the dot-com boom were completed, the analysis shows.

 The figures could be higher since 2012 because of companies’ confidential IPO filings. That year, the Jumpstart Our Business Startups Act went into effect, allowing companies with less than $1 billion in revenue to initially file confidentially for an IPO.
Petco Holdings Inc. this month agreed to sell itself for about $4.6 billion to private equity firm CVC Capital Partners Ltd. and a Canadian pension fund. The company earlier in the year had filed for an IPO and was seeking a roughly $4 billion value, The Wall Street Journal earlier reported.
Interactive Data Corp., a financial data provider, and Ballast Point Brewing & Spirits Inc. this fall also announced they were selling after earlier filing for IPOs. Other firms also are holding back on IPOs even without opting for a sale. Grocery chain Albertsons Cos. and lender LoanDepot Inc. recently postponed IPOs, citing unfavorable market conditions.
Only seven times in the past 20 years have IPO and M&A dollar volumes diverged in this fashion, Dealogic figures show, with one category declining from a year earlier and the other rising.
Helping to drive some of the withdrawals is the poor performance of recent IPOs. Through Nov. 20, stocks of companies that have gone public this year are down on average 2% from their offering price, compared with a gain of 19% for deals in 2014 through the end of that year, according to Dealogic.
That has spooked many investors, especially once the stock market became more volatile this summer, making short-term IPO performance even tougher to forecast.
As a result, they are asking for big concessions from companies on price. Of the last 20 listings through Nov. 20, more than half priced below their projected range, Dealogic figures showed. And the number of health-care and technology IPOs, often the deals with the biggest potential gains, has dropped 43% through Nov. 20 versus the same period last year, Dealogic figures show.
“The event of the IPO now is just not exciting,” said David Rudow, a senior equity analyst at Thrivent Asset Management.
Poor IPO performance has in particular hurt active fund managers, who are the main buyers of IPOs. Many have lagged behind the market at a time when index-driven “passive” strategies are gaining in popularity. Investors pulled a net $125 billion from U.S. stock mutual funds this year through the end of October, according to Investment Company Institute, compared with a net $33 billion withdrawn during that period in 2014.
Among active fund managers, “there’s been a bit of a buyer’s strike for IPOs,” said Joseph Amato, president and chief investment officer at Neuberger Berman.
Meanwhile, shares of U.S. public companies announcing acquisitions in deals over $1 billion have risen an average 2% the day after the announcement, according to Dealogic. That reverses an average 1% drop over the past 20 years.
To be sure, M&A gains appear to be slowing. For example, the 2% jump this year is down from a 3% jump in 2014 and a 4% jump in 2013.
There are also indications investors are beginning to balk at buying more corporate debt. Some big acquirers have had to cut prices on debt they are selling.
Still, at a time when revenue growth is scarce, takeovers will likely remain popular.
“We are in a low-revenue-growth environment for most companies, and M&A remains one of the best ways for them to grow earnings, especially if they can create synergies and cut costs through mergers,” said Chris Bartel, head of global equity research at Fidelity Investments.