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Why IPOs are hurting
Many deals are pricing below their estimated range as investors navigate the stock market's wild swings.
NEW YORK (CNNMoney.com) - As the official start of summer gets underway, the market for companies going public is hitting some headwinds. Nearly two-thirds of the companies that have gone public this month have priced below their estimated price range, according to deal tracker Dealogic. And some firms on deck are cutting their offering prices before heading to market.
It's not exactly the sizzling summer many industry watchers had been expecting as recently as last month. (Full story.) "I would say the last two weeks has been a sobering realization for that sentiment," said Suzanne Skipper, head of equity capital markets at San Francisco-based investment bank Merriman Curhan Ford & Co. The lackluster demand for initial public offerings coincides with the recent downturn in the stock market that has seen the tech-fueled Nasdaq composite tumble 11 percent from the five-year highs it scaled in April and the Dow Jones industrial average slip briefly into the red for the year. Investors' appetite for risk tends to decline when the stock market is choppy, and that can curb demand for companies going public, according to Sal Morreale, who tracks IPOs for Cantor Fitzgerald. And valuations, which are often based on comparable firms in the market, also get hurt, Skipper added. There are exceptions. Ethanol producer VeraSun Energy (Charts), for instance, turned in a stellar market debut. Its shares priced above forecast, even after the estimated price range was bumped up, and the stock jumped 30 percent on its first day of trading on the New York Stock Exchange last week. But for those companies that don't enjoy the bounce of a "hot" sector, it's getting harder to come to market. As a result, buyers are having more of an influence on how deals are being priced. "It's a buyer's market for a lot of these deals," Morreale said. "If you're a business that has got to raise money, companies will accept a cheaper price to get their deal done," he said. Healthy market
While investor jitters seem to be dampening demand for IPOs, companies aren't being deterred from going public and the deal pipeline remains robust. "There has not necessarily been a slowdown in the number of companies coming to market, but there has definitely been a reduction in the valuations garnered by companies going public," Skipper said There are roughly 135 companies that have filed for IPOs in the past six months but haven't gone public yet, in line with the 139 deals waiting in the wings at this time last year, according to Dealogic. Anecdotal evidence also suggests several firms are preparing to go public this fall, Skipper said. "But that doesn't mean that all of them will make it to market, and it doesn't speak to the valuations they will be able to garner," she added. IPOs are used to the ups and downs of the stock market, and while wide investors may be on edge, the market for IPOs overall remains fairly healthy, according to Irv DeGraw, a Sarasota, Fla.-based IPO researcher. "The market has gotten into a level that is very sustainable and that is not too hot and not too cold," he said. Steadiness may be just what investors crave. "A steady IPO market really is a positive development. It brings better companies to market and valuations tend to be more realistic," DeGraw said. --------------------------------- Related: Riding out the stock market storm
Related: Sorting through the ethanol hype |
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