'Tis the Season to Go Public
By Michael V. Copeland

(Business 2.0) – Peace on earth, an end to hunger, and an Xbox 360 would be nice. But for many CEOs of private companies, an initial public offering is at the top of the holiday wish list. Luckily for them, the mood of the stock market's Santas has been improving--and if it holds, the next few months are likely to usher in one of the most anticipated IPO seasons in recent history.

There's a backlog of companies aiming to go public between now and the first few months of 2006, and they're anything but no-name, overvalued startups. Of the 90 or so companies that have already filed, most are profitable and stable, with at least three years of steady income growth. Many, in fact, are household names: clothing retailer J.Crew, credit card behemoth MasterCard, and athletic-gear maker Under Armour.

Normally the annual IPO push would begin sometime after Labor Day, gather steam through the fall, and culminate in a burst of year-end and new-year deals. This year, market watchers had expected an especially active fall, with the total number of IPOs easily surpassing 2004's final tally of 216. But soaring oil prices and a shaky market in the wake of Hurricane Katrina quashed those hopes, and as many as 60 companies delayed their IPO plans. Now, assuming the market bounces back as expected, "you are finally going to see some very well-run companies, with a chance to make a difference in their sectors, come to the public markets," says Mark Lehmann, director of equities at JMP Securities. "They have waited a long time, and it's about to happen."

First in line are those that have already filed, including the aforementioned household names, as well as McDonald's subsidiary Chipotle Mexican Grill, Roomba vacuum creator iRobot, drugmaker Reliant Pharmaceuticals, solar-panel manufacturer SunPower, and San Francisco investment bank Thomas Weisel Partners. After that is a group of fast-growing companies that have yet to file but are widely expected to pull the IPO trigger in early 2006: VOIP telephone service provider Vonage, router maker 2Wire, and Web-based enterprise software company NetSuite. (SEC rules prevent companies from commenting on anything material to their IPO plans.)

But don't expect a return to the buy-buy days of the last decade. This is good news for individual investors, since prices on these companies' stocks aren't likely to get pushed to irrational heights by institutional investors--who, on the evidence so far this year, appear to be acting relatively rationally. "The buy-side guys aren't saying 'I don't care what the company does, how much can I get?'" says David Menlow, president of IPOfinancial.com, an independent research company specializing in initial public offerings. "This market is going to be very structured and orderly."

So unless the stock market goes on an unforeseen bull run, investors will have the opportunity to watch the performance of new issues and pick their stocks at a reasonable value. This year IPO stocks have averaged an 11 percent return on the price at which they hit the public market. That easily beats the 0.7 percent return of the S&P 500 this year as of Nov. 1, and the nearly 3 percent loss for Nasdaq over the same period. The key to choosing IPO stocks, Menlow says, is sticking to the basics: "If you need a 20-minute explanation of why you should buy the stock, forget it."

And if the market refuses to get into the spirit of the season? In that case, get ready for another wave of acquisitions by cash-rich public companies looking to relieve weary venture capitalists and entrepreneurs of their private companies. As for those IPO hopefuls that don't go public or get picked off, they'll just cycle back into the IPO queue. After all, there's always next year.

The IPO Pileup These patient companies are expected to go public any day now.

[*] Proposed. Sources: Company filings