Groupon’s solid trading debut has spurred several smaller deals to come to market in the US. But hopes for an IPO rush appear premature. Instead, the evidence points to a market that is likely to stay shut for many groups that have spent months, or even years, waiting to float.
Web companies and investment trusts that pay high dividends are launching seven deals over the next two weeks, chipping away at a backlog of 149 US companies that are poised to go public but that have yet to find a window, according to Ipreo, a capital markets data and advisory firm.
“Groupon braved the chilly waters to proceed when the rest of the world was focused on Europe. I think that’s going to open the window for some of the better private companies,” says Hugh Evans, small cap portfolio manager at T Rowe Price, which owns Groupon shares.
But the bulk of the IPO pipeline – big industrial, energy and financial companies backed by private equity firms – are unlikely to benefit, market participants say.
“Obviously there are some companies that can access the markets in a more stressed environment with better outcomes than others. But, broadly speaking, I think IPO volumes will still be limited given how volatile the environment is,” says Raj Dhanda, global head of capital markets at Morgan Stanley, which led Groupon’s IPO.
The market faces a test with Delphi, the once bankrupt automotive group. It has scaled back a $1bn offering to $550m, and is now looking to begin trading sometime next week.
Groupon did not have an easy ride. It sold the lowest percentage of its shares in the offering of any company since 2001, according to Ipreo, and enjoyed, by recent internet stock standards, a relatively tame “pop” on its first day of trading of 31 per cent. By contrast, shares of LinkedIn, the social network, more than doubled on LinkedIn’s debut in May.
Nevertheless, the launch has encouraged a number of small names in the current wave of web groups to try to sell shares this month. These include Angie’s List, a website for personal and home services; Imperva, a data security group; and Bluestem Brands, an online retail group.
Investors want growth and continue to look for strong, long-term businesses that have asset growth to at least 2013 and beyond,” says Frank Maturo, head of cash equity capital markets for the Americas at Bank of America Merrill Lynch.
The deals now on the road mark the biggest wave of offerings since July. But this year’s fourth quarter still looks light compared to last year’s record volume of pricings, when General Motor’s $20bn deal led the way. This year’s IPO deal volumes are set to fall short of last years total of $160bn.
It is the larger industrial companies, in particular, trying to raise at least $500m, that are stuck in neutral. They are primarily owned by private-equity firms, taken private during the credit boom, and include Avaya, the telecoms group; Allison Transmission, the automotives group; and Toys R Us, the retailer.
“Many of the private equity-backed companies are more economically focused, and are waiting for greater clarity and stable market conditions,” says Mr Maturo.
While those groups can also raise debt at low yields, many tech companies need equity – in part as an incentive for hiring talented staff – to keep growing.
“These companies are in the market because they need to establish their capital structures, not necessarily because they view conditions to be strong,” says Reuben Daniels, managing partner at EA Markets, a capital markets advisory.
One consequence of the small flotation used by Groupon and LinkedIn is that there are likely to be follow-on offerings. LinkedIn last week filed to sell $500m of stock, more than its initial sale.
“It’s harder to make the case for a new issue when there are stocks that you know so well that are discounted,” says Mr Evans.
Many big asset managers have cash to invest, he adds, but are holding out for some of the bigger names in technology and the internet, such as Zynga, Jive Software or Silver Spring Networks. “Every one of these deals is juvenile compared to Facebook. That is going to be the supernova.”
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