Post-Facebook: 4 companies to test IPO waters

@CNNMoneyInvest June 26, 2012: 2:34 PM ET

NEW YORK (CNNMoney) -- Four companies are gearing up to brave the initial public offering market this week, following a month-long Facebook-induced IPO freeze.

The companies -- ServiceNow, EQT Midstream Partners, Exa, and Tesaro -- come from industries ranging from cloud computing to natural gas to biotechnology.

Compared with Facebook's $16 billion IPO, these four companies are relatively small. Both Exa and Tesaro are aiming to raise less than $100 million, according to Securities and Exchange Commission documents.

EQT Midstream Partners, the largest of the group, is hoping to raise between $257 million and $269 million based on the current size and price of the deal, according to SEC filings.

Still, the fact that anyone, regardless of size, is testing the waters is a good sign. It shows a willingness on the part of companies to risk selling shares to investors on the public markets despite Facebook's botched offering last month.

But if any of these offerings falter, the IPO door could quickly slam shut.

"There's still seething anger by retail and institutional clients in the IPO market," said Scott Sweet, the founder of research firm IPO Boutique. "If these work, then Facebook will just be an unfortunate memory. If they don't work they might as well close the summer off."

Part of the problem with Facebook's (FB) IPO was that its underwriting team, led by Morgan Stanley (MS, Fortune 500), increased the number of shares and the offering price just before the IPO. That dampened demand for Facebook's stock, which is now trading about 15% below its IPO price of $38 a share.

Even with less than ideal conditions right now, most people think underwriters have learned their lesson from Facebook. Pricing is always more of an art than a science. Post-Facebook, most investors think that the underwriters will err on the side of a lower price tag in order to fuel a run-up in the stock price.

"After what happened with Facebook, I imagine underwriters will be more careful about how they price deals," said Mike Sola, a portfolio manager at T. Rowe Price (TROW) that invests in IPOs. "Underwriters certainly won't raise the price range unless there's definite investor interest in that range."

The four companies are set to go public Wednesday, Thursday and Friday of this week with natural gas company EQT Midstream Partners first on deck.

Sola said he'd be surprised if any of this week's IPOs get cancelled, even in the face of choppy market conditions. All four firms have already begun holding a series of presentations to potential investors at so-called roadshows and it's unlikely they'd want to start from scratch.

Should stock prices continue to fall, they could consider simply reducing the number of shares they sell.

Out of the four companies pricing this week, cloud computing firm ServiceNow is the most highly anticipated. Cloud computing companies have typically performed well, said Sweet. Guidewire (GWRE) is up 121% from its initial public offering price, and Demandware (DWRE) is up 56% from its IPO price.

"ServiceNow is still in the sweet spot of IPOs that have maintained their premium," said Sweet.

ServiceNow will also be a big test for Morgan Stanley's underwriting team, which has come under pressure for mispricing Facebook and is serving as the lead for ServiceNow's IPO.

If history is any guide, this batch of IPOs should perform well.

Research firm Renaissance Capital said shares of companies that go public after a so-called drought gained 20% on average during the first day of trading, compared with 11% overall.

After two months, Renaissance Capital said that all post-drought IPOs performed above their offering price. The average gain in that time period was what the firm called a "staggering 64%."

There are 184 companies waiting in the IPO pipeline, according to Renaissance. Two of the most anticipated ones are arts and crafts retailer Michaels Stores and security software company Palo Alto Networks.

This week's performance will be a good barometer for companies mulling an IPO.  To top of page

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