Looking for an End to the IPO Drought

A Resurgence Could Indicate Broader Revival Will Follow

The pace of initial public offerings has slowed to a lull not seen in decades. Only two companies went public during the first quarter of 2009, compared with 12 during the same period in 2008, 41 during the same period in 2007, and 33 during the same period in 2006.¹ Meanwhile, at least 13 companies withdrew or postponed their plans to go public during the first quarter of 2009.²

What does it mean when no companies want to go public on a U.S. stock exchange?

Open House

Launching an IPO is a bit like selling a house. The company may spend months or perhaps years getting ready to present an appealing image to potential buyers. But even though a home seller may make an effort to keep the place clean during the selling process, an immaculate house cannot overcome poor market conditions. Likewise, the timing of an IPO usually has everything to do with the market’s receptivity and very little to do with the company itself, which may have been ready to sell months before coming to market.

The IPO market serves as the stock market’s canary in the coal mine. Companies that want to go public wait for the moment when they believe the offering will raise the most cash. It follows then that a dearth of IPOs is an indication that investors are not in the mood for the risks associated with newcomers and start-ups.

The U.S. IPO market was already struggling before the current downturn began. In recent years — especially since the advent of the Sarbanes-Oxley Act of 2002, which imposed rigorous new public accounting standards that many smaller companies find difficult to afford — start-ups have begun to seek exit strategies other than IPOs. One of the most popular alternatives is to seek acquisition by a large corporation.

There are a few bright spots. First, a tough IPO market tends to weed out all but the most convincing deals. A company that comes to market during difficult times usually has solid fundamentals that may transcend external influences. Second, there is a belief that the IPO market will begin to recover about six months ahead of a broader market recovery.³

There really is no good way to spin the current IPO situation. When companies can’t raise money by selling new stock, they may have difficulty funding their expansion plans. This slows the growth of new investment opportunities in the stock market, a situation that could have long-lasting consequences.

Even if you never expect to participate in an IPO, it’s wise to keep an eye on the pace of new listings. The clues may help with decisions about your portfolio.

1) Hoovers, 2009
2) Reuters, March 16, 2009
3) The Wall Street Journal, March 12, 2009

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by StoneRiver–Emerald. © 2009 StoneRiver, Inc.