2003 Year End Review

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A New Day Has Come for IPOs
By Jeffrey R. Hirschkorn, Senior IPO Analyst

The year 2003 will go down in history as one of the slowest periods for initial public offerings. Deal flow may have been lower, proceeds raised declined, but the underlying themes to 2003: debuting with profitability and an attractive valuation. In most cases, deals with profits increased pricing terms.

Market pundits have concluded that 2003 was a year of rebuilding and retooling of the IPO underwriting field. For 2004, analysts predict a solid year, considering the rather large flow of quality deals in registration with the Securities and Exchange Commission. In the year's final month, there were 23 new deal filings.

For the year, there were 81 IPOs, totaling $13.5 billion in proceeds. Average performance for an IPO stands at 23.99%; average first day pop: 11.87%. Average amount raised: $167 million, down from $237 million in 2002. Those returns are superb for a rather depressed year for initial public offerings. In comparison, the Nasdaq Composite, which represents a bellwether index to measure the success of the IPO market, put together a string of two successful years of solid growth. For the year, the Composite generated an impressive return of 48%.

A chunk of the year's proceeds came in December where 23 offerings totaling $5.72 billion were priced. Of that amount, $2.6 billion was attributable to the IPO from China Life Insurance (LFC). Other sizeable volume attractors included real-estate-investment-trust transactions led by Friedman Billings Ramsey. Incidentally, FBR did a superb job in the underwriting league tables.

While the number of deals in 2003 is almost identical to 2002, the total amount raised declined significantly. For 2002, there were 81 IPOs, totaling $19.2 billion in proceeds, compared to just $13.5 billion raised in 2003 (note: our data excludes closed-end funds and self-underwritten offerings). The best theory on the decline in proceeds stems for an almost absence of sizeable spin-off transactions.

Last year, we saw floats from CIT Group (CIT) and Carolina Group (CG), a tracking stock issuance by Loew's. For 2003, only a handful of spin-off IPOs occurred. One such case: Overnite (OVNT), a transportation services firm that was spun-out from Union Pacific in an Oct. 31 IPO.

Another trend expected to produce some desirable candidates in 2004 was attributed to a late-year surge in Chinese-based IPOs. Demand for shares of Ctrip.com International (CTRP), the Chinese equivalent to Expedia.com, generated strong interest in the United States. Shares - offered at $18 on Dec. 8 - were led to market by Merrill Lynch. By Dec. 29, shares of Ctrip.com were sizzling around $32, 78% above offering. The performances of Ctrip.com and China Life (up 86%) certainly provide evidence that investors love what they see in Chinese IPOs.

"From the beginning of 1996 through the end of 2002, American investment bankers had priced 28 IPOs from issuers based in mainland China," noted Red Herring Magazine in a recent analysis pitched to address peaked interest in Chinese IPOs. "Previously, 2000 was the busiest year for Chinese IPOs, when 12 companies went public in the U.S. Six [Chinese] IPOs have doubled in price since going public."

Furthermore, an evolution in underwriting principles was a major theme in the IPO market of 2003. Risky offerings went by the wayside. In vogue, are deals with profitability, not deals with pipe dreams and long shots to succeed. Our analysis reveals that over 50% of IPOs completed in 2003 were with profits. The remaining half came from sectors that included biotech. Biotech stock IPOs were one of the worst performing markets of the year. At one time, analysts were predicating success for biotech IPOs.

There was a period of the year when we witnessed a flurry of IPO filing activity from biotechs. Some expressed hope that the biotech market, which generally rotates in cycles, would produce decent returns in a changing environment on Wall Street. Not many made it out the door and the ones that did have struggled - for the most part.

Only eight finalized transactions, totaling $490 million in proceeds. Of that group, the lone star was Genitope (GTOP). It priced 3.7 million shares at $9 through W.R. Hambrecht. By Dec. 29, shares of Genitope were up 10% while the average return for a biotech stock IPO reflected a decline of 10.24% from offering and a drop of 14.19% from opening.

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