IPO “Crisis” Crushes Small-Caps, Grant Thornton Contends

On a career level, CFOs should worry about the collapse of the market for initial public offerings because it means “fewer attractive opportunities, and that demand for CFOs is going to go down,” a consultant at the firm warns.

David M. Katz – CFO.com | US

October 7, 2009

The market for initial public offerings — particularly among small-caps — is mired in a crisis, Grant Thornton capital-markets consultants contend. The debacle has been caused largely by wrong-footed regulatory and technological moves rather than the downturn in the economy, they say.

“Over the last several years, the IPO market in the United States has practically disappeared,” according to “Market Structure Is Causing the IPO Crisis,” a research paper issued by the accounting firm Tuesday. “While conventional wisdom may say the U.S. IPO market is going through a cyclical downturn exacerbated by the recent credit crisis, many experts are beginning to share the view of a new and much darker reality: The market for underwritten IPOs, given its current structure, is closed to 80% of the companies that need it.”

Citing figures from Dealogic and Capital Markets Advisory, the authors report that from 1991 to 1997, nearly 80% of IPOs were smaller than $50 million. By 2000 the number of IPOs smaller than $50 million had shrunk to 20% of the market. More recently, the first half of 2009 “represents the worst IPO market in 40 years,” according to the report, which adds that “[t]he trend that disfavors small IPOs and small companies has continued.”

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The return of the IPO

NEW YORK – Coming off its worst year in three decades, the market for initial public offerings is starting to show signs of life.

Eight companies are looking to raise as much as $3.7 billion when they go public next week, the most activity the U.S. IPO market has seen in a single week in nearly two years and a clear sign that Wall Street’s appetite for risk is returning.

IPOs all but dried up in 2008 as investors shunned the traditionally risky bets and moved into safer assets like cash and Treasurys as the stock market tumbled.

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The Economy: Glimmers of Hope in The Darkness

By Al Walsh

Although this pervasive recession/depression continues to hang over us, and I believe the worst is yet to come, there are small positive signs.  Following is a recap of recent observations; many of which I’ve previously shared:

• Commercial credit is showing signs of loosening up – although the “jury is still out” as to who will qualify.
• Durable goods orders are up – indicating some positive stirrings in industry.
• Housing sales are marginally up – although I expect more “dark days” ahead as people use up their unemployment benefits and more mortgage resets occur.  I’ve heard talk of Washington extending unemployment benefits further, which may help matters if they go through with it.
• Businesses have begun receiving federal funds for energy development.  So far, most of the money has gone to big business.  Not much help to entrepreneurs, but good for jobs and business in general.  Smaller companies may receive some indirect benefits via subcontracts from the major recipients.
• The “cash for clunkers” program is popular, spurring auto sales.
• The stock market’s shown signs of life, although I expect dangerous volatility ahead.
• Imports are marginally up, indicating some “fresh breath” in consumer spending.  This will help the shipping lines and common carriers.
• Headhunters I talk to tell me that they’re starting to see some increased hiring action. Nothing to get excited about yet; but a start.
• Consumer saving is on the rise.  The saving rate has been dangerously low for way too long.  The funds deposited with banks should help marginally ease the credit freeze by providing a base for new lending.  Let us hope the banks don’t just sit on it, like they did with the bailout money.
• The rate of IPOs (Initial Public Offerings) is slightly up, providing a positive sign that investment capital is starting to “come out of the woodwork”.
• Industry in general reduced inventories drastically; a mixed-blessing but one that provided cash flow for survival and which will provide a platform for ramped-up production as we come out of the recession/depression and demand increases.
• Consumers are going through the painful process of deleveraging from the high credit positions they’ve been in for years.  Of course many without jobs are increasing those positions for survival, but in general the nation is going through a forced shedding of some credit burden; which is a good thing.
• Other nations are starting to see signs of recovery, including the UK and China.

None of these factors are of great significance themselves, but together they offer some rays of hope.

Stock Market Surge Seen Spurring IPO Growth

It’s a sign of just how bad the market for initial public offerings has been when a report of a mere 12 U.S. offerings raising $1.6 billion in the second quarter gets people talking about a rebound. The numbers are anemic compared with the good old days of 2007, when the spring quarter saw 79 IPOs generate nearly $12 billion in proceeds. Yet the slight turn might be a harbinger of better things to come.

Link to article:

http://www.cfo.com/article.cfm/14164647