When Does The IPO Drought End?

by: The Value Investor

The initial public offering market has seen a strong start to 2012 as many companies got themselves a listing before the much anticipated and totally failed public offering of Facebook (NASDAQ:FB) on the 18th of May.

Public Offerings pushed forward

In anticipation of the public offering of Facebook some ten other companies decided to take advantage of the favorable market conditions and went public in the month of May. Among the prominent offerings were that of the Carlyle Group (NASDAQ:CG), EverBank Financial Corp (NYSE:EVER) and PedroLogistic LP (NYSE:PDH), none of them were an outright success. Some successful smaller offerings included that those of Ignite Restaurant Group (NASDAQ:IRG), Audience (NASDAQ:ADNC) and WageWorks (NYSE:WAGE) which all have seen returns exceeding 20% compared to their offering price.

Slow couple of weeks anticipated...

The pipeline for late May and early June was expected to be light as companies pushed their offering forward to stay ahead in time compared to the offering of the social network. Furthermore, the summer season which is just starting, is traditionally a slow time. However the total failure of the much anticipated public offering of Facebook has resulted in the fact that not a single company has gone public in the last four weeks.

Some companies including kayak.com, Corsair Components and Tria Beauty have either cancelled their offering, or put them on hold for an indefinite amount of time.

Wall Street has to clean up

The very poorly executed offering of Facebook even had a big impact on the share price of its leading underwriter Morgan Stanley (NYSE:MS) which saw a significant share price decline amidst worries about its reputation and possible litigation regarding its role in the offering.

The problem is that Wall Street can only start regaining trust from their investment clients for coming public offerings if it prices them in the right manner and it does not flood the market with shares. The current state leads to a cat-and-mouse game between Wall Street underwriters, which want to bring the next string of public offerings to the market at low prices and the offering companies which want to maximize their proceeds. Corporations are most likely not willing to sell their stock on the cheap, just to restore confidence in the underwriters.

There is no quick fix to get the public offering market going again and a very quiet summer is to be expected. Conditions on global financial markets are most likely volatile for a while as no real solution for the Eurozone's problem are being found.

Keep a close eye on the motives behind the first scheduled public offerings in the coming months. Do companies have to raise cash to stay afloat and are they desperate to raise cash irrespective of the valuation? Or does Wall Street come up with a new way or inducement for companies to sell their stock cheaply?

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.