Doug Chu is Senior Vice President and Head of the Silicon Valley Office and Western Region for NYSE Euronext’s...
In light of heavy volatility during August and September of 2011 the IPO market has weakened tremendously. Only four deals were completed in August, the lowest for any August in over 15 years with exception of 2002 and 2008. Nevertheless, the IPO backlog continues to grow as companies remain hopeful about eventual liquidity in the market.
Deal Flow Has Dried Up
Historically, August is a slow month for IPOs as professionals leave for vacations and markets drift along on lower volume. However, for very different reasons this August’s IPO market was particularly weak, with only 4 IPOs raising a little over $1B in proceeds. In fact, August 2011 was the third slowest August (by number of IPOs) over the past 17 years. September has continued this trend, with no IPOs as of the 16th, disappointing many who had hoped for an immediate post-Labor Day recovery.
Similarly, the drop-off in deal flow is apparent relative to other months in 2011. So far August has been the slowest month for IPOs in 2011 with September potentially shaping up to be similar.
Of the four deals that made it out during the month of August, two were technology deals, one was in the energy sector, and the other was a mortgage investment company. Pricing was mixed with one technology deal and the energy deal pricing below the initial filing range, and the other two pricing within their initial ranges. One deal, Carbonite, had to take a nearly 40% haircut of offer price relative to the initial filing range. However, it has since rebounded and is currently up 25% above its offer price. In contrast, the other technology deal, Tudou Holdings, commonly thought of as one of the YouTube’s of China, priced within the initial range but has since traded down to 42% below its offer price.
Macro Market Conditions Have Led to Higher Volatility and Lower Valuations
The drying up of the IPO market in August is mostly due to the uncertain macro economic conditions that have created enormous market volatility. What is typically a calm month has proved to be the most volatile of 2011YTD. At the beginning of the month, domestic concerns over Congressional raising of the debt ceiling created considerable uncertainty, and eventually led to the S&P’s historic downgrading of US sovereign debt. To add to this, economics reports of slow GDP growth and weak to no jobs growth has worried investors about the U.S. economy. Moreover, renewed fears emerged over sovereign defaults in the Euro zone, a European credit crisis, and the weakening of the Euro. And, finally, remarks from the FOMC sent the market into further turmoil in late September.
In junction with the higher volatility and depressed prices during the month of August, funds have left the equity markets, continuing a trend in place since May of this year. So far, September has shown a slight turnaround, however, it is unclear where what the net fund flow number will be by the end of the month.
In Spite of Market Conditions, Companies Continue to Seek IPOs
In spite of the dearth of IPOs in August and September, new companies seeking IPOs have still been filing with the SEC fairly aggressively. Since August 1st, 40 new companies seeking $7.3B in proceeds have filed to go public. This brings the IPO backlog to the highest mark in over a decade (see recent Renaissance Capital article).
Just as new companies have been filing with the SEC, many companies are also withdrawing their filings. 13 companies have withdrawn their filings, with many more postponing their deals, since August 1st.
The majority of the new filings have been in the energy and technology sectors. Since August 1st, 9 energy companies, seeking $3.2B in proceeds have filed to go public. Similarly, 18 technology companies, seeking $2.3B in proceeds have filed to go public since August 1st. This brings the technology backlog up to a total of 55 companies seeking over $9.1B in proceeds.
NYSE continues to maintain a strong presence in the technology backlog including communications companies Avaya, Imperva and Vocera Communications, SaaS companies Demandware and WageWorks, and semiconductor company InvenSense.