After three years of what seemed like Prohibition in the IPO market, the corks are finally popping again. Seventeen companies filed to go public in August, the highest since May 2002, and 40 are now in the pipeline, the most all year, according to Thomson Financial. But these are different from the rockets that shot up and quickly crashed during the boom. Today’s new issues are more of a slow burn–Netgear is up about $4 since its debut at $14–and they are typically proven, profitable companies that managed to survive a wretched stretch in the economy. “We have the best-quality deals coming to market that we’ve seen in many years,” says David Menlow of the research firm IPOFinancial.com. “The bar has been raised high by investors, and a few companies are sneaking over it.”
This is good news not just for entrepreneurs and investors but also for an economy that finally seems to be staggering to its feet. IPOs are a crucial part of the country’s innovation engine, providing capital to promising companies that can then plow it into research, products–and new hires. In the late ’90s, that system was badly hijacked by an Internet hysteria that allowed companies with slapdash business plans and no track record to go public. For example, Garden.com, a cash-hemorrhaging online retailer, debuted in 1999 at $12 a share and a year later was worth less than dirt. Investigations by the Securities and Exchange Commission and state attorneys general into biased Wall Street research also contributed to a freeze in new offerings.
But even in today’s warm-er environment, going public is still more difficult than it has been in years. Companies that launched IPOs during the boom found they could easily entice investors just by showing rapid growth in top-line revenue. Today firms have to show a track record of solid profits and tight controls on expenses. There’s also less opportunity for “industry rotation,” which happens when biotech or pharmaceutical companies go public en masse because their sector is suddenly trendy. By contrast, the line-up of companies that went public during one week last month included an auto-insurance underwriter, a real-estate investment trust and a regional bank. Among the firms lining up to go public now include the online travel site Orbitz, the biotech firm Genitope and the golf-club specialty retailer 2nd Swing Inc.
The new, rigorous gatekeeping has made IPOs a more reliable bet. Of the last 100 public stock offerings, roughly four in five are now trading above their offering price, with an average 40 percent gain in each stock price, according to John Fitzgibbon, who watches the IPO market for 123jump.com, a newsletter. Over the same 18 months, the NASDAQ rose only 3 percent. Today’s IPO investors are mostly mutual funds and other big institutions, which are more likely to stay with a stock over the long term. The ranks of day traders betting on new issues are much thinner.
Despite the uptick in new stocks, the IPO market still has a long way to go toward full recovery. Few stocks debuted before and during the war in Iraq, and as a result, 2003 could end up being the slowest for IPOs in a decade. Through the middle of September, 26 deals had been brought to the market, less than half the number during the same period last year. The pipeline is finally filling up again, partly because larger underwriters and their customers are only now growing accustomed to stronger SEC oversight, and the new regulations presented in the federal Sarbanes-Oxley Act, which gives new companies more hoops to jump through when it comes to disclosing their financial information. “The system will remain in a little bit of limbo until people understand how all of this is supposed to work,” says Clay Corbis, senior managing director at the investment bank WR Hambrecht.
One firm that could energize Wall Street and renew interest in IPOs among the broader public is Google, the Internet-search firm. Though its cofounder recently seemed to discount the idea, saying that going public “is never the most pressing thing,” many people believe Google will sell stock to the public early next year. Even the mere discussion of another exciting Internet IPO illustrates how times have changed since the stock-market bust. It may be time to put a little more champagne on ice.
