Investors are supporting a steady stream of initial public offerings, despite a prolonged stock market downturn.
By Justin Schack
November 2000
Institutional Investor Magazine
It’s common knowledge on Wall Street that the market for initial public offerings is only as healthy as the secondary market. When the Dow Jones industrial average or the Nasdaq takes a dive, so too does IPO activity. And because debut issues are far riskier than most stocks that already trade publicly, the damage is usually worse for IPOs.
Lately, that well-worn belief is being tested. Since May the Nasdaq composite index has traded in a relatively narrow range, failing to rise much higher than where it began the year and remaining at least 15 percent below its March high of 5,132. Yet IPO activity picked up significantly during that time, rising from a 12-month low of only 25 deals worth $2.4 billion in May to 68 deals worth $8.1 billion in August before trailing off slightly in September (see graph).
To be sure, at this level of activity, the IPO market remains a shadow of its former self. In March, when dot-coms still glistened no matter how far off profits might be, 65 companies raised $12.6 billion. And in April there were 37 deals, which pulled in a total $15.1 billion, including a mammoth $9 billion transaction for AT&T Wireless. But considering the secondary market’s subsequent weakness, the flow of IPOs has been surprisingly strong.
Optical networking and equipment companies are largely responsible for that strength. Shares of ONI Systems Corp., which raised $200 million in a May 31 IPO, gained 230 percent in first-day trading and still change hands for roughly triple their $25 offering price. Other recent hot deals in the sector have come from Avici Systems, Corvis Corp. and Cosine Communications.
“If it weren’t for the optical sector being so hot, we might all be looking for new jobs,” says David Menlow, president of IPO Financial Network, a research firm in Millburn, New Jersey.
Still, after getting burned by the Inter-
net stock meltdown, investors are growing increasingly selective. Dot-coms have a tougher time getting public financing these days than do profitable or near-profitable companies with proven business models. With the economy still strong and record sums of venture capital still funding start-ups, there continue to be attractive deals among established companies.
But getting in on those deals has often meant taking a few of the not-so-hot ones that underwriters postponed after the online bubble burst. “The bankers are saying: ‘You want a piece of that fiber-optic deal? Okay, then you’ve gotta buy these other ones, too,’” says Menlow. “It really is an opportunistic move by the underwriters.”
It may also be another reason that a surprising number of IPOs got done despite the volatile markets and over the normally quiet summer months. During the week of July 31 through August 4 alone, 28 deals were priced, more than in any other week so far this year. Many were completed on less attractive terms than originally envisioned; the average deal in August raised $119 million, compared with $194 million in March and $266 million last November.
Several profitable growth companies have also helped to gird the new-issues market of late. McData Corp., a provider of enterprise switches and software that went into the black early this year, raised $350 million from investors on Aug-
ust 9. Its shares, initially priced at $28, now trade for $125. Shares of Sunrise Telecom, which provides high-speed communications network testing services, have appreciated nearly 50 percent since its July 12 IPO.
Of course, companies continue to see a weak stock market as sufficient reason to put off an IPO; Verizon Wireless and Idealab are recent examples. And the resilience of IPOs may vanish altogether should the current Dow and Nasdaq woes get uglier. But if nothing else, the respectable flow of deals in recent months suggests that the excesses of the past two years may finally have been wrung out of the market.
