Tags: IPO | Market

IPO Market Heats up amid Cautious Optimism

Thursday, 29 March 2012 06:10 PM

A better economic outlook and rising stock market are heating up the market for initial public stock offerings this spring, just weeks before Facebook's highly anticipated IPO.

In the past two days, two companies have posted the biggest first-day gains for a freshly public company since LinkedIn Corp., the professional networking service, had its IPO last May.

Congress, meanwhile, is lessening restrictions on IPOs in an attempt to make it easier for younger companies to raise money. Still, with ongoing worries about high gas prices and unemployment dampening the economy, it's too early to tell whether an IPO recovery is here to stay.

The willingness of more startups to take the plunge suggests that they are optimistic about their business, and also the broader economy. And a strong IPO market could mean more jobs, as companies loaded with fresh cash from investors hire on workers to grow their operations.

This week, shares of Berkeley, Calif.-based Annie's Inc., best known for its organic mac n' cheese and bunny-shaped crackers, soared 89 percent on Wednesday. On Thursday, shares of Baltimore mobile advertising company Millennial Media Inc. jumped 92 percent. Ten companies are expected to go public this week, which would be the most since December 2010.

That comes on top of a strong quarter for IPOs. So far this year, the average first-day pop is around 13 percent, according to the IPO advisory firm Renaissance Capital, and that's the best since before the financial crisis and global economic meltdown. There have been more IPOs in the first three months of 2012 than there have been since the April-June quarter of last year, said Richard Petersen, credit analyst at S&P Capital IQ.

The rush is coming after the economy grew at an annual rate of 3 percent final three months of 2011, the best pace in a year and a half, and hiring is picking up. The Standard & Poor's 500 index closed at its highest point since May 2008 earlier this month. An improving stock market helps fuel demand for IPOs, which are considered riskier investments.

But the IPO market may yet peter out. After all, 2011 started out with signs for optimism, but the European debt crisis and renewed economic weakness put a damper on the second half of the year, freezing the IPO market for months. And while more companies are going public now, they're pulling in less cash. So far this year, U.S. IPOs have raised $5.5 billion, well below the $13 billion as of the same time last year, according to Renaissance Capital. It's also still too early to tell whether efforts by lawmakers to make it easier for small companies to raise money through IPOs will help rev up the market.

The big first-day pops and slew of companies launching IPOs are drawing big headlines, but what matters for investors is what the company does beyond that first day, said Kathleen Smith, principal at Renaissance Capital.

Small-time investors could even lose money if they buy into companies during the first-day madness when the stock is trading well above the price that big investors, such as hedge funds and mutual funds, got the night before.

"A more thoughtful investor might wait until the frenzy is over," she said.

LinkedIn, for example, more than doubled in its May debut, closing up 109 percent at $94.25. But the hubbub didn't last, and LinkedIn, though profitable, saw volatility that's typical with newly traded stocks. It currently hovers around $100 after steady gains this year.

Though far from the dot-com bubble of the late 1990s, much of the investor demand in the past year has centered on technology stocks like LinkedIn, especially companies engaged in mobile devices and social networking.

Demand for technology companies is at a fever pitch with Facebook's IPO, expected later this spring. The Menlo Park, Calif.-based company has said it anticipates raising $5 billion in its IPO, but that amount could double by the time it files its final paperwork. If all goes as expected, world's biggest online social network could be valued at as much as $100 billion once it goes public. That would be the biggest Internet IPO ever.

S&P's Petersen said the "Facebook factor" and gains in the broader stock market are both helping stoke investor demand for IPOs. It's also the end of the first quarter, so it's not uncommon for banks to want to get deals in before the period closes, he said.

There are about 200 companies waiting to go public right now, he said, adding that the question will be whether investors buy in.

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Thursday, 29 March 2012 06:10 PM
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