As GM Preps Offering, The IPO Market Is Still Sucking WindCarl Gutierrez, 08.13.10, 02:00 PM EDT
Household names with strong growth stories can still price deals, but investors have discerning tastes.
The market for initial public offerings has come a long way from the dark ages of late 2008 and early 2009, but continued economic uncertainty and tight credit conditions make for a discerning group of investors for companies that want to come to market. That doesn't mean deals can't get done, but expect the rest of 2010's offerings to be tilted more in favor of household names with strong track records.
The highlight will be General Motors, a unique IPO if there ever was one due to its background and its size. (See "The High Price Of The GM Bailout." and "Another IPO Roadmap For GM.") Despite -- or because of -- all the attention the automaker has been receiving, there remains significant uncertainty over how the market will embrace the offering, says Renaissance Capital research analyst Nick Einhorn. "There are questions over whether the investor will be willing to bet on the company given its tumultuous history, and how easy it will be for the company's underwriters, the government and the public investors to agree on a price."The outlook for GM's IPO, which could be filed with the SEC as soon as next week, says much about the market in general. Though conditions have improved substantially since the worst days of the financial crisis, investors remain selective, resulting in a number of deferred IPOs as companies that meet resistance over fundamentals or price decide to step back to sand down the rough edges.
The three basic components to a sizable IPO, Sweet says, include an increase in year-over-year revenues, a decrease in losses and/or increase in profits year-over-year, and low debt levels, but that mix has been difficult to find. "Though the IPO-pipeline of those still to debut is at a rather robust 150-plus companies, many have been there for a year or longer," Sweet says.
This post-crisis attitude has had an especially strong impact on highly leveraged private equity offerings that defined the excesses of the boom market prior to the crash. "There has been a lot of resistance to over-leveraged companies coming out of the financial crisis, and we have seen a lot of private equity-backed deals get postponed," Einhorn says.
Sweet concurs, adding that in some cases there have been names with multi-billion dollar debt levels that had to cut their IPO price dramatically. "It's rather incredible," Sweet says, adding that the offering prices have been slashed by as much as 50%. Sweet also says biotechnology firms have been especially impacted, though their primary problem has been timing. "The biotechs are coming out way too early," Sweet says. "Most are in Phase Two [clinical studies], which means they're two or three years away from approval, and if and only if they get approval do they stand a chance."