May 20, 2020
By David E Ethridge, US IPO Services Leader
Remember when what we worried about most was the impact of the presidential election on the equity market and, by extension, initial public offerings (IPOs)? That was when we had key foundational elements for a great IPO market.
At that time, all we were talking about was the election impact and the push by many issuers to get IPOs into the first two quarters of 2020. COVID-19 was a possible threat that seemed distant – geographically and emotionally.
The market has since undergone a period of extreme volatility unlike any time in history. The VIX (the volatility index) reached as high as 82 and the Russell 2000 traded down 42% from its January top of 1,705 to a bottom of 991 as of March 18th – the fastest move to a bear market in history. Any hope of a quick recovery like a tornado that blows through quickly were dashed. And with these hopes tossed aside, so were any plans to launch IPOs for the majority of companies other than biotechs and SPACs, both of which rely on milestones versus financial forecasts for success. Bankers have since leveraged shortened, virtual roadshows with conference calls and video meetings to help get six biotechs and 10 SPAC IPOs priced. However, none of these deals have been viewed as “opening” the IPO market.
What will the company that reopens the market look like in the way of scale, profitability and business model? To gain some potential insights, let’s look back at three past periods of distress in the equity markets to see what the IPOs that opened the market looked like then. We’ve turned our attention to 2003 (coming out of the late 2002 market collapse), 2009 (after the Great Recession) and 2011 (following the downturn when US debt was downgraded below AAA). The companies that reopened these IPO markets may surprise you.
The first five months of 2003 were a real slog, with only five IPOs. A market collapse in late 2002 made it difficult to see a turnaround in Q2 ’03, and as a result, growth company issuers were pessimistic. Many people thought we would need a giant, name-brand IPO to open the market again. Potentially something like an AT&T Wireless IPO from early 2000 – household name, gigantic in size, profitable – would be the market’s savior. As it turns out, AT&T Wireless didn’t act as a catalyst because nothing else out there was comparable to AT&T Wireless, which at that date was the largest IPO in history and had a $68 billion market cap. However, there were a lot of companies in venture capital (VC) and private equity (PE) portfolios that looked like a small technology company called iPayment.
Come on, you don’t remember this IPO? We didn’t think so, but Bear Stearns brought this company to market with an $80 million IPO on May 12th. It priced within the range and traded up 31% on the day of listing, and 40% by day 30. This IPO was shortly followed by a bevy of comparable companies that were high-growth that also traded up significantly. The months following iPayment were very active, with 93% of the 75 IPOs from the year priced after iPayment’s successful debut.
We remember 2008 and 2009 as being incredibly difficult given the stress on the financial markets and how that spread to the economy overall. The IPO market was decimated to such a degree that the concept of a frozen market came to fruition. The Q4 ’08 and Q1 ’09 periods saw a single IPO each, but the second half of ’09 was a period of moderate activity that helped set the stage for a solid 2010. What was the deal that brought hope back to the markets? The one that jumps off the page is the single IPO in Q1 ’09, Mead Johnson Nutrition. It priced a $720 million IPO that was upsized at pricing and had all the hallmarks of a can’t miss deal– very large, profitable and well known. However, it wasn’t comparable to many other companies in VC/PE portfolios. As one IPO specialist said at the time, “It’s not going to open up the IPO pipeline…but it could cause some IPOs to attempt a pricing.”
Spin the clock further into the calendar year and you see Rosetta Stone, the language company people were familiar with from any trip to the airport, where its kiosks seemed omnipresent. It wasn’t even the first growth company to price as an online games company from China and an education company came just before it. But it was a deal that turned heads. It looked comparable to many other companies in VC and PE portfolios in size, growth rate and, to a lesser extent, profitability. Its $112.5 million IPO on April 15th priced above the range and was up 40% on the day of listing, as well as 32% 30 days later. From that point forward, the market saw 93% of the 60 IPOs for the year.
Following a solid 2010, the market saw IPOs tick along at a good pace with 29 in Q1 ’11 and 46 in Q2’11. However, on August 5, 2011 the Standard & Poors announced a decision to give its first-ever downgrade to U.S. sovereign debt, lowering the rating to AA+. That change completely shut the window on the IPO market. In hindsight, the IPO market was lucky this occurred in August. Traditionally, it’s not a period of high activity, so there was roughly six weeks to recover from this blow. Nonetheless, the market was put on ice until an unlikely IPO showed everyone the water was warm enough to jump in again.
Ubiquiti, a telecom equipment company, surprised some market participants at launch given it had lost a lead left bookrunner while going through the SEC clearance process which in normal course could delay a company’s IPO for months. However, UBS stepped up and brought the company to market on Oct. 13th in a $105.6 million IPO that traded up 17% on the first day and 30% by day 30. This wasn’t the high-profile, name-brand unicorn that many people expected would reopen the market. Notably, highly anticipated games company Zynga priced its IPO roughly two months later in December.
We aren’t waiting on a white knight in the form of the large, high-profile, “can’t miss” company. Just recently we saw a large, well-received technology company IPO in the U.S. from Kingsoft Cloud Services, a cloud computing carveout of China-domiciled, Hong Kong listed company Kingsoft Corp. This is certainly a positive brick in the road to recovery for IPOs given the size of that deal and it’s successful execution with a four day period of marketing, but this turn of events may look a bit like 2009. It’s success in execution (up 40% on day of listing) is going to embolden others, but we’re not convinced many other companies will be seen by private and public investors in the US as comparable. It’s a hyper-growth, China-focused cloud computing business and especially important for this moment in time is seen as COVID-19 resistant. We do see a “micro window” developing for COVID-19 resistant stories before Q2 ’20 earnings begin to roll in and potentially threaten to re-couple the markets with economic data. However, based on prior periods of extreme volatility and a near cessation in IPOs, the one that may break the dam for most other IPO aspirants is usually a smaller, profitable company with a strategic imperative to be public. A tsunami of pent-up demand can send that deal soaring, and the rest of the market comes forth based on a vision of comparability. The question in our minds is not only when, but more importantly, will companies be ready when the market reopens?
Source: All IPO data is based on Dealogic as of May 15, 2020. IPOs with proceeds that are less than $25mm, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from the above narrative.
All Russell 2000 data and charts are based on S&P Capital IQ data as of April 1, 2020.
Special thanks to Semir Krpo and Katie Whipple for assisting in the drafting of this publication.