Even as the IPO market and tech stocks in particular continued a downward slide since peaking in early March, the first week of the 2Q saw very high IPO activity as 15 companies were added to the calendar and 16 companies submitted initial filings. Among these, China's mega microblogging site Weibo (NASDAQ:WB) set terms for its upcoming $360 million offering. The fact that Twitter, Facebook and Baidu are each down about 20% from last month could raise concerns for the Chinese social network. Another large tech company and a 2006 LBO, Sabre (NASDAQ:SABR), set terms for an $850 million IPO expected to price next week. GrubHub's (NYSE:GRUB) 31% first-day return on Friday may not be a free lunch for early investors if the year's poor aftermarket trading for tech companies continues.
Tech IPOs defy broad industry decline for now
Three technology firms began trading on Friday, and while they gained 20% on average, the specter of the year's -11% average aftermarket returns should continue to impact pricing. Wednesday's The Rubicon Project (NYSE:RUBI) was evidence of that, as the ad-tech company priced at the low end of the range, gained 34% on its first day, and then dropped over 5% in the two days that followed. GrubHub, the takeout and delivery web portal, priced above its range and then gained 31% on its first day even as competitor Yelp fell 14% last week.
IMS Health (NYSE:IMS) completed the year's second-largest IPO and was the first LBO of the year to raise over $1 billion. The TPG-backed company, which provides technology-driven health care consulting, arrived ahead of this week's large LBO offering from Blackstone-owned La Quinta (NYSE:LQ). Opower (OTC:OPWR), which helps utility companies promote energy savings, raised $116 million and gained 21%. Its IPO arrives as public utility companies have had strong performance this year. Tarena International (NASDAQ:TEDU), an operator of computer programming schools and the first Chinese company to list in the US this year, finished the week trading just barely above its offer price.
|IPO pricings (week of March 31, 2014)|
|Company (Ticker)||Business||Deal Size ($mm)||IPO Price vs. Midpoint||Return as of 4/4|
|GrubHub (GRUB)||Online portal for food delivery||$193||24%||31%|
|The Rubicon Project (RUBI)||Largest reaching US online ad exchange||$102||-6%||27%|
|Opower (OPWR)||SaaS for utilities to help consumers cut power costs||$116||6%||21%|
|IMS Health (IMS)||Health care data and consulting services||$1,300||3%||15%|
|Five9 (NASDAQ:FIVN)||SaaS for company call centers||$70||-30%||9%|
|Tarena International (TEDU)||Chinese schools for IT services and software||$138||0%||0%|
|Corium International (CORI)||Develops adhesive drug delivery systems||$52||-27%||-1%|
Weibo and 14 other IPOs set terms
The much-anticipated IPO of Weibo is now on the calendar. The company set terms on Friday after adjusting its first quarter growth outlook and picking a new CEO and CFO. Alibaba will exercise the right to nearly double its stake in the company by purchasing shares from parent company SINA in a private placement, increasing its post-IPO ownership to 32%. Leju Holdings, a Chinese tech firm that offers online real estate services, also set terms on Friday. Both Chinese internet companies are expected to price next week. With six Chinese IPOs in the pipeline [including iKang (NASDAQ:KANG), pricing this week], the performance of Weibo and Leju should indicate investor interest in China ahead of the upcoming IPOs of JD.com and eventually Alibaba.
Travelocity operator Sabre, which is owned by PE firms TPG and Silver Lake, is expected to raise $850 million, which would make it the largest tech IPO since Twitter in October. Paycom (NYSE:PAYC), an HR management SaaS company, set terms just two weeks after close competitor Paylocity (NASDAQ:PCTY) raised $120 million in its own IPO. Paylocity rose 41% on its first day, but has traded down 14% in the aftermarket. Investment bank Moelis and Company (NYSE:MC), scheduled to price next week, will join a small group of companies that served as their own IPO bookrunner. Fast casual Mediterranean restaurant Zoe's Kitchen (NYSE:ZOES) follows last year's two restaurant IPOs with similar models, Potbelly (NASDAQ:PBPB) and Noodles and Company (NASDAQ:NDLS). Both stocks popped over 100% on their first day, but Potbelly has since fallen 42% while Noodles has mostly remained flat. Meanwhile, Chipotle Mexican Grill (NYSE:CMG), up 83% last year, remains a paragon of what a well executed fast casual restaurant can achieve.
Though record biotech activity largely defined the first quarter and fueled the highest number of first quarter IPOs since 2000, the second half of March saw an emergence of tech IPOs. The IPO market broadened further last week, with a diverse group of large, small, foreign, domestic, tech, energy, financial, health care, yield and growth companies seeking public funds. Even within health care, only one of the five companies setting terms was a biotech. The largest of these health care companies, Phibro Animal Health (NASDAQ:PAHC), competes in the same space as Zoetis (NYSE:ZTS), which raised $2 billion in early 2013.
|IPO terms filings (week of March 31, 2014)|
|Company (Ticker)||Business||Deal Size ($mm)||LTM Sales ($mm)|
|Sabre (SABR)||Travelocity site and travel industry technology||$850||$3,050|
|Enable Midstream Partners LP (NYSE:ENBL)||Natural gas and crude oil infrastructure assets||$500||$3,120|
|Weibo (WB)||China's largest microblogging service||$360||$188|
|Moelis & Company (MC)||Investment bank and financial advisor||$201||$411|
|Phibro Animal Health (PAHC)||Food and medicine for farm animals||$200||$662|
|Leju Holdings (NYSE:LEJU)||Chinese online-to-offline real estate services||$195||$335|
|Opus Bank (NASDAQ:OPB)||California-chartered commercial bank||$187||$145|
|Paycom Software (PAYC)||SaaS for payroll and HR management||$126||$108|
|TriVascular Technologies (NASDAQ:TRIV)||Stent grafts for endovascular aortic repair||$91||$20|
|Quotient (NASDAQ:QTNT)||More efficient diagnostic blood tests||$75||$19|
|Zoe's Kitchen (ZOES)||Fast-casual Mediterranean restaurants||$70||$116|
|Lombard Medical (NASDAQ:EVAR)||Stent grafts for endovascular aortic repair||$60||$7|
|Cerulean Pharma (NASDAQ:CERU)||Biotech: targeted kidney and ovarian cancer therapies||$60||$0|
|Viggle (OTC:VGGL)||TV show tracking app||$50||$17|
|ECM Energy Services (Pending:ECME)||Oil and gas equipment rentals and related services||$20||$33|
Sixteen companies file for an initial public offering
Memorial Resource Development (NASDAQ:MRD) plans to join other large oil and gas E&Ps that completed IPOs this year [EP Energy (NYSE:EPE), Rice Energy (NYSE:RICE), GeoPark (NYSE:GPRK)]. Memorial operates 892 net drilling locations, mostly in the Cotton Valley formation of North Louisiana. Abengoa Yield (NASDAQ:ABY) is designed to offer investors a stable stream of income based on the company's long-term contracts, but a look at last year's successful IPO from NRG Yield (NYSE:NYLD) (up 9% last week) suggests a growth opportunity too. Investors may be attracted to Advanced Drainage Systems' (NYSE:WMS) history as a former portfolio company of Berkshire Hathaway, which held the construction pipe maker for 22 years before it sold its stake to PE firm American Securities in 2010. Ares Management (NYSE:ARES) will offer public investors ownership units of its alternative asset management partnership. Materialise sells 3D printing software and related services. While peers 3D Systems and ExOne both gained over 100% in 2013, both stocks have declined over 40% this year. TrueCar (NASDAQ:TRUE), which filed for a $125 million IPO, runs a widely used automobile pricing site that helps consumers save money when they arrive at the dealership.
Cheetah Mobile's play as a Chinese security software company could also entice investors given the recent interest in Fire Eye, which had doubled its beginning of year stock price by early March but has fallen since then. Tuniu (NASDAQ:TOUR), another Chinese IPO, benefits from the growing tourism industry in Asia. NW18 HSN Holdings (Pending:HS), which operates an e-commerce site and a 24-hour shopping television program, became the only Indian company in the pipeline; only one Indian company completed a US IPO in 2013.
|IPO initial filings (week of March 31, 2014)|
|Company (Ticker)||Business||Deal Size ($mm)||LTM Sales ($mm)|
|Memorial Resource Development (MRD)||Oil and gas E&P focused on North Louisiana||$700||$232|
|Abengoa Yield (ABY)||Solar energy and transmission yieldco||$600||$211|
|Ares Management, LP (ARES)||Alternative asset management firm||$400||$479|
|Advanced Drainage Systems (WMS)||World's largest producer of HDPE pipe||$300||$1,072|
|Cheetah Mobile (CHEE.RC)||Chinese mobile security; spun out of Kingsoft||$300||$124|
|Arista Networks (NYSE:ANET)||Ethernet switches for cloud-computing data centers||$200||$361|
|TrueCar (TRUE)||Publishes new car transaction data||$125||$134|
|Materialise (MTSE.RC)||3D printing services and software||$125||$95|
|Tuniu (TOUR)||China's largest packaged tours website||$120||$322|
|Imprivata (NYSE:IMPR)||Authentication software for the healthcare industry||$115||$71|
|PBF Logistics (NYSE:PBFX)||PBF Energy spinoff operating its logistics assets||$100||$51|
|Quintana Shipping (Pending:QSP)||Owns and operates a fleet of nine drybulk vessels||$100||$31|
|NW18 HSN Holdings (HS)||Online retail arm of Indian media group Network 18||$75||$51|
|Lumena Pharmaceuticals (Pending:LIVR)||Biotech: rare liver diseases including NASH||$75||$0|
|Bankwell Financial Group (OTC:BWFG)||Commercial bank with seven offices in Connecticut||$50||$30|
|ECM Energy Services (ECME)||Oil and gas equipment rentals and related services||$20||$33|
IPO market snapshot
So far this year, 71 IPOs have raised $12.6 billion and produced an average first day return of 20%. The Renaissance IPO ETF (symbol: IPO), a cap-weighted basket of newly public companies and indicator of post-IPO performance, has fallen 1% compared with a 1% gain for the S&P 500. Over the last 30 days, the IPO ETF has dropped almost 9% compared with -0.5% for the S&P 500. For the first time this year, the ETF's YTD returns are lower than the S&P 500’s after the market experienced a broad selloff of tech stocks. Tech companies rely heavily on investor exuberance to maintain their lofty valuations, but this enthusiasm seems to have subsided for now. The active IPO pipeline includes 126 companies looking to raise a total of $32.3 billion.