Pedigree Deals Created Year-End Buzz

The IPO market has certainly undergone significant changes after investors lost billions in many now defunct dot-com entities. As such, investor selectivity has never been higher than it is in today's environment for new issues. Historically, stock issuance in the IPO market has seen 75% of deal flow list shares on the Nasdaq. For the past two years, that percentage has been decreasing at a rapid clip. Of the year's cadets, over 30 transactions listed shares on the New York Stock Exchange while a couple of stragglers placed stock on the American Stock Exchange.

Typically, billion dollar transactions list share s on the Big Board. Although, there have been exceptions to that theory, we've also seen smaller, but quality deals list shares on the New York Stock Exchange. While most associate the mega-offerings of the year [such as the $3.9 billion offering from Travelers Property (TAP.a)] with the exchange, educational preparatory services firm LeapFrog Enterprises (LF) has enjoyed success in the marketplace. By the way, LeapFrog happens to be the year's top performing new issue.

Blockbuster transactions will undoubtedly continue. The year will end this week with no activity, but it didn't stop investment bankers from stepping up efforts to sell two critical deals. One received strong attention while one gave rise to screwing the average investor. Albeit, there hasn't been much to celebrate this year, but two pedigree transactions helped give some life. Both yielded strong financial statements.

First up was the offering from the Chicago Mercantile Exchange (CME). Led to market by joint book runners Morgan Stanley and UBS Warburg, the futures marketplace priced 4.8 million shares at $35 with strong demand evident by pricing the deal above indicated talk. Co-managers on the first U.S. exchange to complete an offering were Salomon Smith Barney, J.P. Morgan and William Blair. Speculation regarding the success of the IPO will hopefully prompt other exchanges to complete a respective deal. Right now, the odds on favorite is the Nasdaq Stock Market.

Following the stellar debut of the Chicago Mercantile Exchange was the reincarnation of disk-drive superstar Seagate Technology (STX). The company offered alongside selling shareholders 72.5 million shares at $12, below expected talk of $13-$15. Morgan Stanley and Salomon Smith Barney commandeered the underwriting team. Underwriters for the deal included Goldman Sachs, J.P. Morgan, Bear Stearns, Credit Suisse First Boston, Lehman Brothers, Merrill Lynch and Thomas Weisel Partners.

IPO Monitor has reported on the many problems that plagued the resurfacing of the dominant force in disk-drives. The controversy actually dates back to an LBO of the prior life for Seagate Technology that was consummated in November 2000. Common stockholders were screwed when buyout firms Silver Lake Partners, Texas Pacific Group, JP Morgan Partners and August Capital commandeered a takeout (alongside existing management) for $1.7 billion. However, when one closely inspected the purchase, the final price on the deal was really a tad over $1 billion. Reason: Seagate Technology was sitting on nearly $800 million of cash on its balance sheet. This resulted "in a minimal net-equity investment by the purchasers."

That deal was consummated over objections of many company stockholders mainly because it was part of a complex deal in which Seagate holders received the company's then-valuable stake in Veritas Software. At that time, the value of Seagate's ownership in Veritas stood at $15 billion. When the buyout was being constructed, stockholders were more concerned with the Veritas position. For those who didn't sell stock in Veritas, fell victim to the technology meltdown. Shares reached $160 and now trade for $17.

Withdrawal Pace Decline

With investment bankers extremely careful on the prospective offerings they piece together, the pace of deal withdrawals has actually decreased over prior years, According to our data; there were nearly 40 transactions that withdrew planned offers. Most of the withdrawals resulted in acquisitions of companies in registration while others canceled due to market conditions. Of the group, the noteworthy withdrawals came from Advantage Payroll Services, Monday Limited, MedcoHealth Solutions and United States Marine Repair.

Advantage Payroll Services, an employer-assisted payroll management firm, withdrew its $144 million offering after rival Paychex paid $240 million for the company. Monday Limited, the former consulting division of PriceWaterhouseCoopers, axed its $1 billion IPO after Hewlett-Packard acquired the entity. The same situation applied to United States Marine Repair, of which was acquired by United Defense Industries. Both defense companies are controlled by investment engine The Carlyle Group. MedcoHealth ran a different course. Market conditions and questions pertaining to booking of revenues from its parent Merck & Co. led to the withdrawal of the $1 billion offering.

For postponed deals, there were a couple of entrants. Loews Cineplex Entertainment, the latest in a series of movie theatre IPOs, postponed its transaction because of market conditions. Movie theatre IPOs resurfaced after most of the popular chains were purchased at significant discounts while in bankruptcy. Unlike a deal withdrawal, a postponed offering is still "technically" active as determined by the U.S. Securities and Exchange Commission. To continue with the deal, an issuer must file an amended S-1 or SB-2, but for withdrawn deals, a new S-1 or SB-2 must be filed with regulators.