The seasoned IPO professional knows the springboard for the new-issues market is the IPO pipeline. As Father Time turns the calendar’s pages to 2005, there’s plenty in the IPO pipeline.
As of December 30, 116 companies had filed plans for IPOs to raise $24.8 billion, according to available records. The number of potential issuers and the dollar-volume figures are more than double what they were a year ago.
Flip the calendar back to January 1, 2004, when 49 IPOs were looking to raise $8.9 billion. By the time 2004 ended, 238 IPOs had been priced, raising $45.2 billion.
The underwriting process, of course, depends upon an investor-friendly stock market. That happened in 2004. It wasn’t easy.
The Nasdaq Composite Index, the barometer of the IPO market, went from a peak in January at 2,153.83 to a bottom in August at 1,752.49, and back up to a peak in December at 2,180.54 at publication time on December 31, the last trading day of the year.
Stock market’s ‘watch’ list
Before delving into 2005’s IPO outlook, let’s take a look at the stock market.
The cracks in the Street’s wall of worry are high oil prices, ballooning budget deficits, growing trade deficits, and a weak U.S. dollar - all of which have been known to drive interest rates higher in the past. Each of those items has pushed the stock market into sell-off mode in the past.
Nevertheless, there is a glimmer of hope that hasn’t been discussed anywhere, except in this Red Herring column. It is “the specialist’s short-sale ratio.” (For details please see IPO Watch: Market Psychology 101.)
Red HerringThe specialist’s short-sale ratio
The specialists on the floor of the New York Stock Exchange are required to maintain an orderly market in the stocks assigned to them. The specialists are required to buy shares in down markets, as well as to sell and short-sell stocks in up markets. The reason for that is to cushion the stock market from any heavy swings of buying or selling in particular stocks. In other words, the object of the game is to keep a reasonable balance in supply and demand.
Should specialists be heavily committed on either side of a stock, it can give a clue as to the stock market’s direction. A large long position coupled with a tiny short position indicates specialists have absorbed a lot of selling by investors and the stock market could turn upward. On the other hand, a tiny long position and heavy short position indicates specialists have absorbed a lot of buying by investors and the stock market could turn lower.
Each Monday, the New York Stock Exchange reports the total weekly trading on the Big Board. The report includes the number of shares that specialists purchased, the number of shares that specialists sold, and the number of shares they shorted (or borrowed - to be bought back later).
The key number is the short-sale figure, which tells the number of shares the NYSE specialists have shorted in the past week. From this comes the “specialist’s short-sale ratio.” In this ratio, the top figure or numerator is the amount of stock shorted by the NYSE specialists and the bottom figure or divisor is the volume of total short sales.
What the specialist’s short-sale ratio means
When the specialist’s short-sale ratio rises above 60 percent, it is a bearish signal for the stock market.
When the ratio falls below 45 percent, it is a bullish signal for the stock market.
When the ratio falls below 35 percent, it is an “extremely” bullish signal for the stock market.
From July 1970 through May 2003, the specialist’s short-sale ratio was in the “20 to 29 percent range” only three times. It happened twice in June 1982 and again in July 1982. It took another 21 years before that happened again, in May 2003.
For the week ending May 9, 2003, the specialist’s short-sale ratio was 28.5 percent. The ratio fell into the “20 to 29 percent range” five more times during the rest of 2003.
That trend took hold for good in 2004, starting with the week ending March 12; the specialist’s short-sale ratio has stayed below 30 percent for every week since then. It fell as low as 20.1 percent for the week ended June 25, 2004.
Bull crossing
Here’s a historical snapshot showing how many times the specialist’s short-sale ratio has slipped into the “extremely” bullish range of 20 to 29 percent over the last 35 years:
· July 1970 to May 2003: 3 times
· May 2003 to December 2003: 6 times
· January 2004 to present*: 48 times
(* There is a two-week time lag. At publication time, the most recent report was for the week ending December 10, 2004. The specialist’s short-sale ratio was 24.4 percent.)
On Thursday, December 20, the Nasdaq closed at 2,178.34 - up 43.3 percent from 1,520.15 on May 9, 2003, when the specialist’s short ratio first started moving into the range of 20 to 29 percent.
That leaves the 2005 outlook for the stock market extremely bullish, based upon the specialist’s short-sale ratio.
So where does that leave the IPO market?
What to expect from the IPO market in 2005
IPO professionals expect the new-issues market will keep riding the upswing of November and December 2004. This upward trend and its momentum were much stronger than in the preceding 10 months.
During November and December, 58 IPOs were priced, raising $9.4 billion. The monthly average was 29 deals, raising $4.7 billion. The average opening-day gain was 16.3 percent.
During January through October 2004, a total of 180 IPOs were priced, raising $35.8 billion. The monthly average was 18 deals, raising $3.58 billion. The average opening-day gain was 10.99 percent.
IPO professionals think the new year will pick up where the old one left off and run for another three to six months. They see a lot of money available for the IPO market.
A caveat: They don’t see any Googles out there. They expect the IPO filings to start picking up toward the end of January or in early February. In short, they expect IPOs to ride the current trend.
IPO blockbusters in waiting
In the meantime, the IPO pipeline already holds some interesting brand names and a handful of blockbusters.
The blockbusters are:
- Celanese filed for an IPO to raise $1 billion on November 11. At publication time, no offering date had been set. Based in Dallas, Texas, Celanese is a producer of value-added industrial chemicals.
The Underwriters: The co-lead managers are Morgan Stanley and Lehman Brothers. The co-managers are Banc of America and UBS Investment Bank.
Lehman BrothersThe Venture Capitalists: Affiliates of The Blackstone Group and BA Capital Investors Sidecar Fund.
- Huntsman filed for an IPO to raise $1.6 billion on November 24. At publication time, no offering date had been set. Based in Salt Lake City, Utah, Huntsman produces commodity chemical products like adhesives, aerospace, automotive, construction products, and others.
The Underwriters: The lead manager is Citigroup. The co-managers are Credit Suisse First Boston, Merrill Lynch, and UBS Investment Bank.
Credit SuisseThe Venture Capitalists: HMP Investments and MatlinPatterson Global Opportunities Partners.
- PanAmSat Holding filed for an IPO to raise $1.12 billion on December 20. At publication time, no offering date had been set. Based in Wilton, Connecticut, PanAmSat operates 24 in-orbit satellites offering video, corporate, Internet, voice, and government communications services.
The Underwriters: The co-lead managers are Morgan Stanley, Citigroup, and Merrill Lynch.
The Venture Capitalists: KKR Millennium GP, TCG Holdings, and Providence Equity Partners IV.
- Wright Express filed for an IPO to raise $1 billion on November 23. At publication time, no offering date had been set. Based in South Portland, Maine, Wright Express provides payment processing and information management services to the commercial and government vehicle fleet industry. The company is being spun off from Cendant.
The Underwriters: The co-lead managers are JP Morgan, Credit Suisse First Boston, and Merrill Lynch.
The Venture Capitalists: None
Brand-name IPOs
- Dolby Laboratories filed for an IPO to raise $460 million on November 19. At publication time, no offering date had been set. Based in San Francisco, Dolby Laboratories develops digital and audio sound technologies for theaters, homes, cars, and elsewhere. Audiophiles around the world are well versed in Dolby sound.
The Underwriters: The co-lead managers are Morgan Stanley and Goldman Sachs. The co-managers are JP Morgan, Adams Harkness, and William Blair.
The Venture Capitalists: None
- FTD Group filed for an IPO to raise $180 million on November 23. At publication time, no offering date had been set. Based in Downers Grove, Illinois, the FTD Group sells fresh-cut flowers, floral arrangements, plants, gifts, and floral-related services to consumers and retail florists by telephone and online.
The Underwriters: To be announced.
The Venture Capitalists: Green Equity Investors IV.
- Lazard Limited filed for an IPO to raise $850 million on December 17. At publication time, no offering date had been set. Based in Hamilton, Bermuda, Lazard is a financial advisory and asset management firm.
The Underwriters: The lead manager is Goldman Sachs. Co-managers are Citigroup, Lazard, Merrill Lynch, Morgan Stanley, Credit Suisse First Boston, and JP Morgan.
The Venture Capitalists: Green Equity Investors IV.
Big-swinging book-runners
As we ring in the new year, it’s worth noting the names of the book-runners most likely to shape the IPO market in 2005.
As of December 30, the top four book-running managers accounted for 47 of the 116 deals in the IPO pipeline. They were expected to raise $13.7 billion - or more than half - of the projected $24.7 billion in the IPO pipeline.
They were:
· Credit Suisse First Boston has 15 deals in the IPO pipeline, which are expected to raise $3.3 billion.
· Lehman Brothers has 12 deals, expected to raise $3.1 billion.
· Citigroup has 10 deals, expected to raise $2.8 billion.
· Morgan Stanley has 10 deals, expected to raise $4.5 billion.
Some IPO gurus are predicting that 2005 will wind up about the same as last year, when 238 IPOs were priced. They might be on target. History is on their side.
It is worth noting that the only other time that 238 IPOs were priced in any single year was in 1970. The next year, 253 companies went public.
For savvy investors, those numbers might be more soothing than any hangover remedy.
Happy New Year!