IPOs – 2008 Results

US IPOs

Please note: Includes 1, 21, 24, 58 and 12 SPACs in 2004, 2005, 2006, 2007 and 2008, respectively. Chart provided by Renaissance Capital www.ipohome.com

Rough year for IPOs may lead to opportunities in 2009

by Renaissance Capital Analysts

The overall drop in issuance was huge, with global proceeds falling 69% year-over-year, and the most established IPO markets, the US and Europe, were hit particularly hard. In the US, excluding Visa’s record-breaking deal, IPO proceeds would have been the worst since 1994 as venture capital and private equity deals virtually disappeared and the market for SPACs dried up. While the successful debut and strong aftermarket performance of one US deal in November and stirrings in other markets toward the end of the year were positive signs for IPO activity, the global IPO market still has a long way to go to full recovery.

Our 2008 Annual Global IPO Review will analyze activity and returns in the US and all other major markets and shed light on when risk capital may return.

Key takeaways:

Global IPO activity dried up as a result of extreme risk aversion and credit woes.

US gained market share solely because of Visa’s record $18 billion offering.

Almost 50% of new issues fell on their first day of trading and aftermarket performance was poor.

North America: US volume fell sharply as traditional drivers, tech, healthcase and consumer, disappeared.

Europe: Western Europe issuance fell, but Eastern Europe picked up some of the slack.

Asian-Pacific: Activity was driven by economic growth and increased market liquidity.

Middle East: IPOs were fueled by changing regulations, infrastructure development and privatizations.

Latin America: Financial/consumer woes stifled Brazilian deal flow.

Full pipeline should help global activity recover as long as valuations are reasonable and returns improve.

Global IPO activity dried up as a result of extreme risk aversion and credit woes

After a gradual slowing of activity over the first half of the year, the US went three months without an IPO during the second half of the year, the longest dry spell since the recession of the 1970s, and only a single November IPO prevented the drought from stretching into 2009. International activity was only marginally stronger. After 93 global IPOs in the first half, only 26 companies were able to raise over $100 million in the last six months of the year, down an incredible 91% year-over-year. For the year as a whole, the number of IPOs fell 78% to 120 and total proceeds dropped 69% to $81 billion.

U.S. gained market share solely because of Visa’s record-breaking offering

In 2008, the U.S. market share of global IPO activity was 30% compared with 17% in 2007, thanks solely to the $18 billion Visa offering; without Visa, its market share would have dropped to 10%. While Visa was comfortably the largest deal of the year, the next fourteen largest deals were listed on non-U.S. exchanges. Three of the top fifteen deals were Saudi Arabian, highlighting the Middle East’s emergence in the IPO market; the region accounted for 16% of total proceeds, up from 6% last year. The Asia-Pacific region also contributed several billion-dollar deals, making it the only other major region to gain market share, albeit only slightly.

Many companies planning to go public this year opted to stay out of the market entirely. Nearly 300 companies scheduled to go public in 2008 withdrew or postponed their applications, according to Dealogic, an investment banking technology firm that studies the IPO market.

But larger private companies can’t put off initial public offerings indefinitely. As these companies scale up, so do their capital needs. The cost of expanding internationally, buying a major competitor or starting a new product division is beyond what even large venture-capital firms can provide. Unless the larger private companies can tap the IPO market, they can’t continue to grow — or even survive.

“Some of these companies are going to fail,” Sweet says. “Venture-capital firms are only taking the very best. They don’t want to tie up their money. The credit crunch has made it very, very difficult for any company to get money.”

Ernst & Young’s Forer says interest in IPOs won’t pick up until investors see stability in the equity markets. That could take years.

“I think when you speak with investment bankers, we hear a lot about the end of 2009, but I think they are being paid to be positive,” says Forer. He recalled that the IPO market took two years to recover after the Internet bubble burst. “This recession is about the fundamentals, and I think it is much deeper.”

By the second half of next year, Sweet says, there may be a trickle of companies testing the waters with initial public offerings. If those IPOs go well — meaning there is significant, sustained demand for the stock offerings — then perhaps 2010 will be a healthy year for IPOs, he says.

Adelson, the Digg executive, isn’t taking any chances. He plans to make Digg profitable within two years by aggressively expanding advertising and keeping spending down.

“You have to get there on your own,” says Adelson. “When the market returns in two, three, four years, maybe there is an opportunity.”

Produced by Darragh Worland

Published Dec. 29, 2008