Thursday, 24 May 2012

Is the IPO Window Open... and Why Does it Matter?

I have spoken before about IPO windows; when they are open, an IPO is possible and when they are closed it is not.  We have seen a number of high-profile digital media IPOs over the last year including LinkedIn, Groupon, Zynga and Facebook.  While most of these issues “popped” on their opening day, Facebook notably did not.  LinkedIn was up 109% on its first day; Facebook closed pretty much even.

Of the seven well publicised IPOs listed above, only two were trading above their IPO price as of May 22, 2012.  It is interesting to note that the richest IPO (as measured by the highest multiple of LTM revenues), actually performed the best and more than 100% revenue growth has now pushed this multiple down from over 30 at the IPO to 17 as at May 22 (still very high).
An open IPO window is a symbol of general health in the financing markets.  IPO’s return cash to VCs who then continue to invest in private companies, and they provide the now public companies with cash and a currency for acquisitions.
It should be pointed out though that the window is not open for all companies.  There are many sectors that have a tough time raising capital right now including base metal companies, solar companies and smaller companies in general.  The IPO window often shuts quickly as a result of a disastrous event or as bubbles collapse (mortgage crisis in 2008, twin tower attacks and Greece leaving the EU may do it this time).
With Facebook not outperforming on its opening day, the S&P500 down over 8% since early April and the EU not taking any concrete action on its Greece and Spain challenges, is the IPO window still open?  I would have to yes, but not very far.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

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