An Analysis of U.S. Equity New Issues

Editor's note: This is the first of a series of studies by Ben Holmes on the IPO market over the past two years. The purpose is to gauge the performance records of the IPO market as a whole, as well as the track records of the major underwriters and IPO industry groups, based on data taken from the ipoPros.com historical archives. The results might change the way you think about IPOs.

During the week of June 12, 2000, we celebrated the second anniversary of the founding of ipoPros.com, and the completion of our second year of gathering, analyzing and reporting IPO data from the U.S. markets. During this extraordinary period, we've experienced an unbelievably varied range of market conditions.

Beginning in the summer of 1998, we saw a complete shutdown of new IPO deal production. This lasted until late November, and was followed by the most financially productive and rewarding 16 months the U.S., or for that matter, the world, IPO markets have known. That bull run was cut short in late March of this year.

Some believe that was due to a general lack of quality in the deals, others simply blame oversupply. The last three months following this shutdown have been marked by erratic IPO performance, throttled-down supply and a general feeling of uncertainty about the direction the market ultimately will take.

Two years was a pretty noteworthy milestone for us. In looking at our historical archive, it struck me that we had amassed a fairly large data set. We have long talked about doing a performance study, and now seemed like a perfect time to tackle the project. The first phase of this study is a look at long-term underwriter performance, based upon the IPOs priced during the two-year period from June 1998 to June 2000, a total of 822 IPOs.

We analyzed closing price data for all 822 issues at various time periods. The resulting list is of those underwriters who produced a minimum of four IPOs during the two-year period, and the average price performance for each of the underwriter's deals over time. Where a merger of two underwriting firms has occurred, the historical deals from both entities were combined to form a pooled average. Note: We cover only those IPOs that have a share price of at least $5 and a deal size of at least 750,000 shares. The deals must be "firm commitment" underwritings (i.e. those with a stated size and price range), and have at least one U.S. underwriter to qualify.

Looking at the table, you will notice a shaded field in each performance category. This shows the highest value in each column. Right away you'll notice that Morgan Stanley Dean Witter captured the top spot in four of the six price-performance periods that we measured. While this is very impressive, a quick check of some other names in the list will show that in the upper tiers of Wall Street firms, the competition is fierce -- and the margins among contenders are slim.

I want to draw your attention to two time periods in the table that correspond to specific events in the IPO life cycle. The 30th-day price column dovetails almost perfectly with the end of the quiet period of an IPO, that being 25 days after the trade date for a deal. The 180th-day price column is also interesting because the duration for an IPO's lockup period is almost always the boilerplate 180 days.

There is one very clear and surprising trend demonstrated in the table, that of price action over time: It's a simple exercise to skim each row from left to right and determine whether a given underwriter's deals trend up, down or sideways in the months following issuance. What I found remarkable was just how many show an improving trend. This flies directly in the face of the commonly held belief that IPOs, over time, are a losing proposition.

That bias against holding deals long term was planted early in my career by a similar IPO study produced by Prudential Securities. Released in March 1994, that study included data on 1,500 IPOs that came to market in 1991, 1992 and 1993. The conclusion? That holding IPOs posed the least amount of risk in the days or weeks immediately following pricing.

The Pru study showed a clear trend for returns on IPO investments to erode over time, eventually turning negative. As a result, it provided for many investors the justification they sought for flipping, or selling IPO shares immediately for a quick profit. (The irony was that the study was produced by a firm that openly berated flippers). Why then, are the conclusions of our study different from those produced by Prudential?

In the Pru study, as well as in many subsequent studies, the data were not broken down by underwriter. Instead, IPO data were evaluated in the aggregate, and the conclusions drawn were based on the IPO market as a whole. No attempt was made to differentiate between those underwriters whose deals performed well over time and those whose deals fell apart.

Our study evaluated the deals of each firm separately, enabling us to rank the underwriters by performance over any given time period. I think this approach yields much more useable results than that of aggregating the data.

As with any column or article I produce, I welcome your questions and input.

Note: Appearing later this week, a look at the performance of various industry groups.

Underwriter Performance Based on Average % Gains at Selected Time Intervals
Underwriter	IPOs	1st Day	30th Day	60th Day	90th Day	180th Day	June 16, 2000
B of A Securities	12	47.0%	37.1%	15.5%	35.1%	48.4%	155.4%
Barron Chase	5	25.6%	-5.1%	-24.1%	-29.7%	-44.4%	54.9%
Bear Stearns	36	49.9%	69.4%	68.4%	106.0%	129.4%	49.5%
Chase H and Q	40	43.0%	67.0%	49.3%	76.3%	115.4%	147.4%
CIBC World Markets	12	28.1%	27.3%	60.3%	52.1%	77.9%	80.8%
CS First Boston	81	91.1%	97.3%	112.8%	150.2%	264.9%	132.8%
Dain Rauscher Wessels	6	19.7%	54.7%	106.0%	50.8%	82.7%	181.1%
Deutsche Alex Brown	42	66.7%	79.6%	97.0%	146.2%	163.5%	149.1%
Donaldson Lufkin	47	47.4%	87.7%	82.8%	93.5%	47.6%	21.5%
First Union Cap Mkts.	7	8.2%	5.5%	-6.0%	-6.3%	-19.8%	-41.2%
Friedman Billings (fbr.com)	4	13.9%	19.0%	27.0%	53.6%	25.8%	30.9%
Goldman Sachs	92	99.7%	99.4%	121.2%	155.4%	179.4%	157.7%
JP Morgan	12	49.2%	57.4%	18.7%	22.8%	64.1%	-3.0%
Lehman Brothers	41	61.2%	76.7%	85.4%	93.7%	92.7%	74.8%
Merrill Lynch	52	61.4%	94.8%	93.1%	142.2%	183.6%	87.4%
Morgan Stanley Dean	76	120.3%	139.9%	132.2%	163.8%	223.4%	211.5%
Needham & Co.	4	30.2%	45.9%	13.3%	46.4%	70.9%	4.6%
Paulson Investments	6	-4.4%	9.6%	-10.3%	-3.3%	13.3%	-36.4%
Prudential Securities	15	32.7%	40.7%	95.8%	165.5%	211.5%	27.4%
Robertson Stephens	67	87.3%	97.3%	99.2%	111.0%	131.4%	127.2%
Roth Capital Partners	9	15.7%	4.1%	-2.0%	9.8%	43.0%	23.7%
Salomon Smith Barney	29	35.5%	42.0%	30.5%	42.2%	59.6%	30.6%
SG Cowen	5	81.4%	50.9%	27.3%	89.6%	173.0%	-2.9%
Thomas Weisel	6	98.2%	90.7%	82.6%	129.7%	5.8%	46.5%
UBS Warburg	7	52.1%	18.6%	53.4%	52.9%	46.3%	45.4%
US Banc Piper Jaffrey	11	46.0%	39.1%	8.1%	7.2%	69.3%	1.8%
WR Hambrecht & Co	4	57.3%	1.5%	-20.2%	-20.2%	-21.4%	-33.1%
Source ipoPros.com

A very deserved thank you to our very own Jonathan Conway, who worked some particularly long and hard hours to produce the data used in this article.