Thursday, June 18, 1998
Timing isn't everything for IPOs
By AMANDA LANG
New York Bureau The Financial Post
ÿPricing an initial public offering is always a tricky business, as underwriters and company executives walk the line between getting as much as they can for the company while still providing a decent return for investors after the stock starts to trade.
ÿIn uncertain equity markets, the process becomes trickier still, as leery investors bid down the price they are willing to pay.
ÿWhen investment bank Goldman Sachs Group LP announced earlier this week that it would go public, it was perceived in some circles as a sign that the bull run in equity markets could be drawing to a close. After all, Goldman the most profitable bank on Wall Street surely falls into the category of "smart money," and the timing of its IPO could imply that it sees a correction ahead.
ÿUnfortunately for Goldman, the markets' gyrations with the Dow Jones industrial average falling 207 points on Monday only to rise 164 points yesterday could lower the amount of cash it is able to raise.
ÿIn the month after a significant market decline, the prices of public offerings tend to drop below their original filing range in some cases, up to 70% below.
ÿMidtown Research Associates, a Manhattan-based researcher that focuses on IPOs, has come up with data showing a sharp decline in offering prices immediately after or in the month of a 2% or greater drop in the Standard & Poor's 500 index. In January, for instance, IPOs were priced as much as 52% below their filing range, after the S&P 500 dropped 5% in December 1997.
ÿFor companies now pricing their public offerings, a downturn may mean less cash in the coffers. But for investors, the price declines could represent a real opportunity.
ÿToronto's Celestica Inc. is planning what promises to be the largest public offering in its sector of contract manufacturing and, as it kicks off its "road show," analysts say they like what they see. Its parent company, Onex Corp., has a great deal of experience pricing IPOs in a way that benefits both investors and the company. Still, Celestica's final offering price its preliminary range is US$16 to US$18 could drop if market turbulence keeps investors shy.
ÿ"The risk of any IPO is that you are hostage to the prevailing market environment, and much more so than in a private sale," says Neil Barsky, co-founder of Midtown Research. "Once a company files its red herring prospectus [which includes a filing range], it's difficult and a little embarrassing to have to pull the offer."
ÿSeagram Co.'s planned public offering of its Tropicana Products Inc. subsidiary could find itself influenced by a choppy market. Tropicana has filed a preliminary prospectus, but has yet to set a price for its offering. Parent company Seagram will spend the next few weeks entertaining offers from private bidders for the division before it takes its chances in the public auction of an IPO.
ÿSince Seagram intends to sell almost all of its holdings in Tropicana, it is likely to seek out the best price, whether public or private, and so far analysts have said it is likely to get a better price from the public market. That could change if investor appetite for new issues dries up.
ÿThe good news for investors is that in a falling market, good companies are easier to spot, because public offerings are valued based more on their fundamentals than on current hype about a sector, industry experts say.
ÿThat's why in a tough market many small-cap IPOs perform badly, or are pulled altogether. Even in a market that is declining, underwriters want to price an IPO in a way that "leaves some money on the table" or room for the stock to rise.
ÿFor investors interested in Goldman, Celestica or Tropicana, a difficult market could simply mean they get the same quality company at a bargain price. There is also anecdotal evidence that suggests larger IPOs perform better, long-term.
ÿAnd one final bit of optimism: Midtown's data also shows that in 1997, public offerings that traded at or below their filing range actually performed better than those priced at or above range. Barsky cautions, however, that the data is no way to pick an investment and it does not break down IPOs across sectors or by market cap. But for jumpy investors, it's something to cling to.
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