Late Wednesday, two small-cap companies, ReachLocal (RLOC) and Accretive Health (AH), priced their IPOs well below expectations. While these two companies may not serve as the most accurate barometer for the overall well-being of the IPO market, there are some troubling aspects to these two deals which points to an IPO market that may be poised to freeze up.
Above all else, the pricing of both deals was the most troubling aspect to them. Accretive Health was only able to garner $12 for its IPO, well below the expected $14-$16 range, while ReachLocal’s shares were priced at $13, well below the expected $17-$19 range. To make matters worse, Accretive Health was only able to price 10 million shares as opposed to the 13.3 million shares underwriters were hoping to sell.
On a final note, investors should keep in mind that both deals were lead by the likes of Goldman (GS), J.P. Morgan (JPM) and Bank of America (BAC). If these firms were unable to get firm prices on these deals, what will second-tier investment banking firms be able to offer to companies fledgling to go public? Not much, in our view.
Both of these deals hint at an element of desperation by both the underwriters and the respective companies looking to get their deals completed before the window for IPOs has closed. In a certain regard, you cannot blame both sides. After all, with a major top for equities being formed, if not already in place, the IPO market is about to freeze up again.
As deal-making comes to a screeching halt, two logical short plays to consider are Greenhill & Co. (GHL) and Lazard (LAZ). Both companies have significant exposure to investment banking, and their respective earnings estimates appear to be way too high for 2010 should a frozen IPO market take hold.
Disclosure: No positions in any of these names