Disappointing Times Cause Massive Shift in IPO Volume
By Jeffrey R. Hirschkorn, Senior Analyst

When we entered the third quarter, many analysts were expecting a modest improvement of what transpired during the year's first half. Unfortunately, that wasn't the case. The overall market continued to face embattled sessions with massive layoffs, profit warnings and the latest concerns relate to our newly announced strike on terrorism. Of course, the Street was caught off guard when the government reported that second quarter GDP slowed worse-than-expected.

Many market observers will tell you that without an established trading pattern it is extremely hard, if not impossible, to launch IPOs. Despite the huge downturn in deal issuance, underwriters took notice and started to bring out deals in industries worthy of attention.

So what is the IPO market left to do? The answer is "regroup". "For the time being, regrouping means putting offerings on hold," said Renaissance Capital Management, in its latest recount on the new issue market. "For much of the year, the IPO market has been absent a driving theme to catch and hold investor interest."

Healthcare IPOs

Case in point: Healthcare stocks represented the biggest portion of the quarter's issuance. Albeit, its only five deals, but worthy of attention. Of the group, Wright Medical Group (ticker: WMGI), the lone offering from JPMorgan, stands as the quarter's top performing stock while the remaining class of components became prisoners of the market and posted declining entrances.

Although there was a slowdown in deal volume, the pace of new filers accelerated by quarter's end. One deal of particular interest is the $100 million filing by Weight Watchers International. Weight Watchers has plans to list shares on the Big Board and has enlisted co-lead managers Credit Suisse First Boston and Goldman Sachs to facilitate the sale.

Benchmark Performance

One way to closely gauge the performance of IPOs is to look at the benchmark by which analysts measure the new issue marketplace. Typically, 75% of IPOs trade on Nasdaq and industry veterans utilize the Composite as the best measurement for the IPO market. For the quarter, the Composite posted a decline of 31% and was the second worst quarter in index history. But the real intriguing number is the massive descent on a year-to-date basis – 39%.

Conversely, some in the IPO crowd feel the need to compare the performance to that of the Russell 2000. The Russell 2000 is an index comprised of small-cap stocks and the idea behind this comparison is that most traditional offerings are of small-cap nature. Bearing that in mind, the Russell also fell 18.7% during the quarter ended Sept. 28.

With many losing jobs (especially in the investment-banking field), underwriters, along with issuers, began to realize that now might not be the perfect time to launch an IPO. Although, analysts anticipated that once Labor Day past, then underwriters would have the opportunity to commence road shows. That was the plan when the preliminary IPO calendar for September called for 14 entities to complete respective offerings.

Terrorism Delays Supply

Then you know what happened next. Terrorists struck our nation and tried to rob us of our freedom. Many lives were lost and families were devastated by the destruction at the Pentagon and World Trade Center. Even prior to the attack, the markets were unable to create a sustained pattern whereby allowing investors to come in from the sidelines and place bets.

Continued uncertainty about the economy has led many potential issuers, including Prudential Financial (proposed ticker: PRU) to reconsider the timing for its IPO. Citing the quiet period for its inability to expand on its decision, a spokesperson for Prudential recently commented that the firm would reevaluate its intentions in the next three-to-four weeks.

Revisiting the Past

Overall, the quarter managed to produce 13 deals, totaling $2.9 billion in global proceeds. The real story behind the quarter's malaise happened to be the deteriorating performance of initial public offerings. Through Sept. 28, the average return for a deal issued during the third quarter stood at a loss of 11.9%, with the best offering turning in a 35.2% gain and the worst yielding a decline of 59%.

Forget about performance! The quarter ranks as one of the worst periods since 1985 when a total of $1.48 billion was raised from the sale of 86 deals, reports research from IPO Desktop (www.ipodesktop.com). In terms of stock issuance, we've tied the previous sale of 13 issues that took place in 1976. However, as times advanced and the Internet craze began to take aim, the all-time high for proceeds from stock sales came during the third quarter of 1999 when underwriters reeled in $21.9 billion.

Billion Dollar Gorillas

While most of the quarter's deals fall into the small-cap category of the market, we did manage to have a billion dollar offering hit the Street. Accenture (ticker: ACN), the former consulting division of Anderson Worldwide joined Wall Street with the assistance of joint lead managers Goldman Sachs and Morgan Stanley. Along with a slew of co-managers, Accenture was able to fully price 115 million shares at $14.50 and similar to most deals of the quarter, the Bermuda-based concern finished on a down note.

Still, Accenture's performance is much better than the downfall experienced by one of its closest competitors. KPMG Consulting (ticker: KCIN), debuted earlier in the year, and by the close of business on Sept. 28, posted a decline of 39.4%. Again, when KPMG debuted there was a significant amount of questions pertaining to the firm's valuation. Prior to its debut, an offering shell game was orchestrated when several facelifts to the IPO was done.

Move Over Goldman, Regionals Take Aim

On to underwriters, the slowdown in deal issuance has definitely hurt the bottom line and that has translated into significant staffing cuts. The quarter's top performing underwriter, in terms of deal issuance, happened to be Morgan Stanley with three IPOs totaling $2.14 billion. Goldman Sachs ranked second because of its involvement with Accenture.

Incidentally, the sell-off has provided lift to the resurgence of regional investment banks. As our rankings show, regional outfits that include A.G. Edwards, RBC Dain Rauscher and U.S. Bancorp Piper Jaffray have prospered in a market where the major banks have struggled to pick up new business. More of this trend is expected to continue, analysts say.