The U.S. market for initial public offerings was already hurting before Facebook Inc. came along. But Facebook may have just stuck a dagger in it.
The social media behemoth’s $16-billion (U.S.) share offering was priced to squeeze every last penny out of a U.S. IPO market that was already nervously counting its coppers. Its subsequent highly public and massively expensive belly-flop has alienated investors and triggered a major re-calibration of IPO pricing that could take months to resolve, slowing the market to a crawl in the meantime.
Sound like an exaggeration? Consider what’s happened in the IPO market since Facebook’s incredible sinking stock made its debut.
In the intervening two weeks, not a single IPO has come to market. Not a single IPO has even been priced. Nearly 200 companies have IPO plans on file with regulators, and none are on the launching pad since Facebook’s flame-out.
The next Internet sector IPO that had been expected to follow Facebook, travel website Kayak Software Corp., this week cancelled the marketing road show for its $50-million offering. London-based jeweller Graff Diamonds Corp. pulled the plug on its planned $1-billion issue just a day before it was going to be priced. Formula One, the world-famous auto-racing organization that had been looking to launch a $3-billion offering by the end of June, announced it is delaying the issue until later in the year.
Renaissance Capital LLC, a Greenwich, Conn., advisory and research group specializing in the IPO market, said that of the 22 U.S. IPOs that had been planned for launch in May, fully half were either postponed or withdrawn entirely. The 11 that went forward were well below the monthly average of 18 in the three months prior to May.
“Some of these deals being pulled, it’s not because these are bad companies,” said Paul Bard, director of research at Renaissance. “Some aren’t getting valuations they’re willing to accept.”
Canadian sources said earlier this week that our (much smaller) domestic IPO pipeline still looked pretty healthy. But Argent Energy Trust decided later in the week to delay its road show, an indication that in Canada, too, pricing in the IPO market has become a contentious issue.
Facebook doesn’t deserve the blame for all of this; Mr. Bard noted that the IPO market was already sputtering in the weeks before Facebook’s debut, as rising risk out of Europe and falling stock and commodity markets had made new stock listings an increasingly tough sell. So far this year, 47 per cent of U.S. IPOs have ended up being priced below the original target price range set by the issuers.
Facebook isn’t actually one of those – its issue price was above the original range the company set. But it is one of the six IPOs in May that are now trading below their IPO price, more than half of the May new issues.
Normally, Mr. Bard said, about three-quarters of IPOs trade above their IPO price, and on average they show a positive return from their first-day closing price; earlier this year, the IPO market was showing double-digit returns over those first-day prices. Now, he said, IPOs for the year to date are down from their first day close, and have underperformed the overall stock market.
What’s Facebook’s role in all this? By launching a glitzy, high-profile, wildly anticipated IPO that in retrospect was massively overpriced, it not only shined a 16-billion-watt spotlight on the deteriorating environment for raising money through the IPO market, it almost certainly deepened and accelerated the fall. If you were hesitant to pony up the money companies were seeking for their new listings before, you’re really spooked now; and if you’re a company or an underwriting team trying to nail down your price, it’s suddenly hard to know where to start.
No wonder that there hasn’t been even a single U.S.-based IPO filing since Facebook’s debut.
“What we’re hearing is that everyone is just kind of waiting,” Mr. Bard said. “We expect there will be a lot of pressure on pricing and valuations.”
The bottom line, he says, is that investors don’t want to pay too much only to see their investment decline in short order. Facebook’s face-plant was on such a large scale that it has exposed a gulf between what companies seek from the market and what badly burned (and now-suspicious) investors are going to be willing to pay. That gulf could be impossible to close for many new issuers in the coming months, until the two sides can come to a new understanding of how to value IPOs.
“When investors aren’t making money on IPOs, that’s a major issue,” Mr. Bard said.