The stock market plunge in the wake of the September 11 terrorist attacks provided a selling opportunity for Francis (Buzz) Raborn.
The CFO of United Defense Industries - maker of the Bradley infantry vehicle and other defense equipment - called his traditional bank, Lehman Brothers, and recruited Goldman, Sachs & Co. to work swiftly on putting together an IPO strategy by October for a December execution. The sudden jump in defense stock prices after September 11 inspired the company to push ahead with IPO plans in 2001. “We’d had an IPO in the back of our minds since we were purchased by Carlyle Group in 1997,” says Raborn. “We knew if we didn’t go out by the day we did [December 14], we would miss our window of opportunity for last year, and if we waited for 2002, we probably couldn’t pull it together until February.”
United Defense wasn’t alone in its trip to the market, which headed up in the fourth quarter after a two-year slump. Companies, especially those in the health care sector, rushed to issue a total of more than $17.8 billion in stock in the final quarter of 2001 (including Rule 144A private placements). It was the year’s second-highest quarter in both issues and volume.
Wall Street predicts a similar strengthening during the first quarter of this year. “Market stability is an important factor for new issues, and in the fourth quarter we saw greater traction and visibility. We’re coming through the deep despair of earlier quarters,” says Mark Hantho, co-head of North American equity capital markets for Morgan Stanley. Issuers and investors are growing increasingly comfortable with stock valuations in 2002. “Investors don’t feel like they’re catching the proverbial falling knife,” explains Hantho.
Instead of withdrawing from the market and waiting until a market turnaround was clearly visible, insurance companies, for example, rapidly got back on course with demutualization plans that had been put on hold after the terrorist attacks in September. On September 11, Des Moines, Iowa-based, Principal Financial Group’s management was on its road show in Paris promoting its $1.85 billion IPO. The IPO market came to a screeching halt, and for the first time in 25 years, a month passed without a single new issue.
But Principal was determined to stay on schedule and was one of the first companies to return to the IPO market. “After the initial turmoil it seemed like markets stabilized, and we could see no major benefits in waiting any longer,” explains Michael Gersie, the insurer’s CFO. “You could flip a coin whether to start or wait until January 1. There was no guarantee that later would be better than sooner.” The company priced its deal in October. Its decision to move forward paved the way for the quarter’s largest equity offer, Prudential Insurance Co.'s $3.48 billion IPO.
“Demutualizations have so many moving parts, companies are more reluctant to postpone than more nimble issuers,” says Hantho.
Mark Tercek, co-head of equity capital markets at Goldman Sachs - which underwrote roughly 40 percent of all fourth-quarter deals - thinks the period’s strong performance proves there is great institutional appetite for high-quality investment opportunities. “Our fourth-quarter deals were for companies with several characteristics in common: great management teams, strong track records and attractive earnings outlooks,” Tercek notes.
Companies wishing to issue IPOs this year will have to offer similar strengths. “There are reasons to think the market will be active,” says Tercek, pointing to corporate strategies that require tapping the capital markets. But in a market that is still nervous about the economy, only the strongest issues will suceed.
