The diminished appetite for IPOs stems partially from the shaky returns… (David Paul Morris, Bloomberg )
The painful drop in the stock market has sucked the air out of initial public offerings.
Companies have withdrawn their stock offerings this month at the fastest pace since the dark days of the 2008 global financial crisis, as suddenly gun-shy investors have lost interest in anything seen as even marginally risky.
Beyond the negative effect on investors, the drying up of IPOs is one more obstacle in the path of the U.S. economy as companies have trouble raising cash to boost employment or to invest in new products or facilities, experts say.
"It reflects a deterioration in business confidence and an unwillingness to expand the operations of companies," said Jane Caron, economist at Dwight Asset Management in Burlington, Vt. "That means less investment spending, less hiring and therefore less income, not only for the companies but for households."
In a measure of the IPO woes, there are no offerings scheduled at the moment, and none are expected until at least the middle of next month.
That's an abrupt turnaround from earlier in the year, when the IPO market was expanding solidly and many experts were worried that investors' intense craving for social media and other Internet companies had become excessive.
"The market [for IPOs] can be red-hot and ice-cold," said Scott Sweet, senior managing partner of Tampa, Fla.-based IPO Boutique. "Earlier it was red-hot. Right now, it's ice-cold."
Investors still are interested in several coveted social media companies that are expected to make their debuts later this year — primarily Zynga Inc. and Groupon Inc. But even those companies would probably be unable to fetch the prices they could have earlier in the year, experts say.
"The interest in them has gone down," Sweet said. "They'll come out but they may be delayed. No company in their right mind would attempt the IPO market right now."
Analysts believe Facebook, which has yet to file, would receive a robust debut no matter the stock market conditions.
Even with the market's uptick this week, the Dow Jones industrial average is down almost 12% from its April 29 peak.
Seventeen companies have withdrawn their planned IPOs this month, the most since 18 companies did so at the height of the global financial crisis in December 2008, according to research firm Dealogic.
Only four IPOs have been completed this month, and several have run into problems.
Tudou Holdings Ltd., a Chinese video website, slumped on its first day of trading last week, and its shares are down 13% from their $29 IPO price. The stock market's travails already had forced the company to price its stock at a sharp discount to a bigger rival that went public in December.
Shares of Carbonite Inc., a computer services firm that helps clients retrieve lost electronic files, rose 24% in their debut two weeks ago and still are 52% above their IPO value. But that's only after the company slashed its IPO to $10 from its original expectations of $15 to $17.
The diminished appetite for IPOs stems partially from the poor returns for the sector. The average IPO is down almost 6.7% this year, compared with a 25% average gain last year and a 16% average rise in 2009, according to Renaissance Capital, an IPO investment-advisory firm.
Aside from 2008, this is the only year in the last decade with a negative return.
Investors have been burned by social media and other Internet companies that had scorching IPOs earlier this year. Shares of LinkedIn Corp., the professional networking site, are up 66% from their IPO price, but have skidded 32% from their mid-July peak. Zillow Inc. is down 14% from its high, while Pandora Media Inc. is down 33%.
"It really gets people skittish about being in the IPO space when they're nursing a portfolio of IPOs that are down," said Kathleen Smith, a principal at Renaissance.
When the IPO market picks up, investors will have the chance to scoop up strong companies at attractive prices, said David Menlow, president IPOfinancial.com, a research firm in Millburn, N.J.
And there is some hope that corporate executives are already betting that the market will eventually rebound. Six new companies on Wednesday filed the paperwork to begin the process of going public, though it could be many months before they do, according to Renaissance. Those companies are Brightcove, Genomatica, Laredo Petroleum, Inergy Midstream, Jive Software and Eloqua.
"This is clearly a buyer's market," Menlow said. "Investors will have the ability to buy very solid companies at very reasonable prices."