Making a killing on initial public offerings used to be easy.
At the peak of the technology boom, little more than a decade ago, a plentiful supply of companies vied to sell stock on the exchanges, and investors were assured mouthwatering returns.
These days, the deals are fewer and the returns more modest.
Companies are set to raise more than $45 billion through IPOs this year — the most since 2007, according to data provider Dealogic. But if you scratch the surface, there are signs the market is less healthy than it appears.
Almost a third of the money raised in IPOs this year came from one deal, Facebook Inc.’s $16 billion offering in May, and the number of companies taking themselves public may end at a three-year low.
The pipeline, or backlog, of companies planning to sell stock is also thinning.
“It’s a reflection of the psychology of the market today. It’s not strong. It’s moderate to weak,” says Rob Lutts, chief investment officer at Cabot Money Management in Salem, Mass.
While 437 companies have filed for an IPO this year, 178 have withdrawn or postponed their planned listings, Dealogic data show.
The state of the IPO market matters beyond Wall Street. Besides giving investors the chance to buy into fast-growing parts of the market, offerings give companies the money to expand and hire workers.
Scott Cutler, head of global listings at NYSE Euronext, which runs the New York Stock Exchange, estimates that more than 90 percent of a public company’s employee growth comes after it has listed on an exchange.
IPO activity is dictated largely by the health of the overall stock market. Falling markets discourage companies from going public. Facebook’s calamitous market debut also put the brakes on IPOs. The social networking company’s offering was the most keenly anticipated market debut at least since Google’s in 2004. But concerns about revenue from smart-phone users spooked investors, and the offering was plagued by technical glitches.
The stock was priced at $38 and fell almost immediately, dropping as low as $17.55 on Sept. 4. The negative publicity helped shutter the IPO market for more than a month until EQT Midstream Partners, an energy company, sold stock June 16. Companies including American Tire Distributors and Crosair, a computer memory company, were among those withdrawing IPOs.
“That deal has become a textbook case of how not to do a deal,” says Quincy Krosby, a market strategist with Prudential Financial. “That IPO really chastened investors.”