Will the IPO season end with a whimper?
In a sign of uncertain times, the number of companies that have gone public this year has plummeted 75%.
SAN FRANCISCO (Fortune) -- It's an annual ritual on Wall Street - the fourth quarter IPO season, when a flurry of companies make their debut on the public markets before New Year's. But given today's volatile market, and the dismal performance this month of what seemed sure to be a no-brainer IPO in Rackspace (RAX), you have to wonder what kind of year-end bump we might get.
Clearly, 2008 has been one for the record books in the sheer paucity of companies that have made it out the door - 43 so far, down a stunning 75% compared to the same time last year. We'd need 14 companies a week to go public between now and the end of the year to catch last years' 273 completed initial public offerings.
That's not going to happen, but some companies will get out. Even in the depths of the 2001-2003 IPO drought, 70 to 80 companies went public, and excluding last year's boffo numbers, 200-plus IPOs have been the norm. Where 2008 will end up in that range is anyone's guess, but now is about the time when a company needs to have filed to even have a shot at going public in the fourth quarter.
So what companies are brave enough to file? Who is going to lead the year-end charge?
"One of the groups is alternative energy," says Paul Bard, a senior analyst with IPO research firm Renaissance Capital. "First we saw solar companies go public, now with Boone Pickens and others bringing attention to it we are starting to see it broaden to wind and other alternative energy companies." Of the last 17 companies to file for an IPO, almost one-third are green energy companies.
Wind companies that have filed recently include First Wind Holdings (it's picked WNDY as a ticker), a Newton, Mass-based company that owns, develops and operates wind farms across the United States and in Canada. Another is Noble Environmental Power, which flipped the switch this year on new wind farms in New York and has other projects under development across the U.S.
If you include its electric cars business, lithium ion battery company A123 Systems is another alternative energy company that would like to get out before the end of the year. The company is based in Watertown, Mass., with technology spun out of MIT and venture backing from blue-chip VCs Sequoia Capital and others. A123 is one of two companies under contract to develop batteries for General Motors' (GM, Fortune 500) Chevy Volt plug-in electric hybrid, due to hit the showrooms sometime in 2010.
That's a good story to sell, and A123 is already causing chatter among the IPO investing set. "Their growth is potentially off the charts," says Scott Sweet, senior managing partner of IPO Boutique, which provides research for hedge funds and high net-worth individuals. "What I especially like is that the proceeds are going toward expanding manufacturing and paying off debt, as opposed to paying off insiders."
The other group that could lead us out of an IPO drought at the end of the year span different kinds of industries but have size in common. Analog chipmaker Avago, which filed for an IPO just last week, is a KKR-buyout that used to be part of Agilent (A, Fortune 500). The Singapore-based company has raked in $2.4 billion in revenues over the past 12 months.
McJunkin Red Man, a pipe and fittings supplier to the oil and gas industry, took in $4.3 billion in revenue the last 12 months while hospital and rehab clinic operator Select Medical had $2 billion in revenue. In such a jittery market, these large, mostly profitable companies (Avago has posted a loss so far this year) may be the kind of relatively safer bet that investors are looking for.
An outlier in the big-and-safe-is-better theory is Russian search company Yandex. While it hasn't filed yet, the Internet company, which is bigger than Google in Russia, is widely rumored to be looking at the fourth quarter for an IPO, and has the name and the growth to pull it off. Because it is based overseas, Yandex also has fewer hoops to jump through, and could file in the coming weeks or months, and still make the 2008 deadline. Yandex representatives could not be reached for comment.
Whatever happens in the fourth quarter, it's likely to be a good indicator for 2009. The stock market is typically a leading indicator for the economy as a whole, and IPOs are perhaps the market at its most forward-looking. If the market starts seeing signs of a general recovery next year - even if it is late 2009 - we could indeed see a bit of a rally in the IPO market in the next quarter. If that recovery gets shoved off farther and farther into the future, we could be in for a much longer IPO drought.