Medco Pulls the Plug on IPO

Wild swings in U.S. stocks have all but shut down the new issues market over the last week and a half, and a slew of companies have delayed their initial public offerings or canceled them outright.

On Wednesday, Merck's (MRK Quote - Cramer on MRK - Stock Picks) pharmacy benefits unit Medco became the latest company to scrap plans for a public offering. In a filing with the Securities and Exchange Commission, the company, which had already postponed the offering three times, said the decision was "due solely to market conditions."

"The biggest enemies for the IPO market are uncertainty and volatility, which abound in this market," said David Menlow, president of IPOfinancial.com.

Pricing Pressure

Medco had hoped to sell 46.7 million shares and raise as much as $1 billion. The decision to scrub the offering suggests that even though the major averages have rallied in the last few sessions and some analysts believe stocks have seen their worst levels, firms considering an IPO aren't as convinced the downtrend has really reversed.

Earlier this month, Merck postponed the deal after an article in the The Wall Street Journal said the unit had recorded revenue from co-payments made by consumers for prescriptions.

While the practice didn't affect earnings, it stoked fears that the company was using aggressive accounting techniques -- such worries have been enough to drag down the stock prices of a number of companies since the start of the year.

"A company not only has to be profitable but also pristine in image," Menlow said. "[Medco] did not give that footprint in any way."

The withdrawal of the Medco deal and the shelving of the IPO of PriceWaterhouseCoopers' consulting division have dealt yet more blows to the investment banks, who have seen their underwriting fees dwindle as the market for new issues remains sluggish.

Tuesday night, PwC said the consulting arm would be acquired by IBM (IBM Quote - Cramer on IBM - Stock Picks) for $3.5 billion. Analysts believe PwC would have had difficulty pricing its planned offering, not only because of the tough environment for the consulting industry, but also because of the firm's perceived conflicts of interest between auditing and consulting.

Menlow said it is becoming somewhat of a trend for companies to file for an IPO, only to be bought out by another firm before it reaches the market. For instance, earlier this year U.S. Marine Repair and AmeriChoice Corp. both filed with regulators to go public, but before they finished their deals, they agreed to be acquired by other companies.

"When a private company has shown their innermost secrets through filing a registration, it makes them a prime target for acquisition," he said. "This is a market that has unparalleled value for the buyer but is horrible for issuers."

Picky Investors

Last week, seven companies -- CAE, Cinemark, Dunlop Standard, Graham Packaging, Nomos, Republic Airways and Safety Insurance -- all postponed or withdrew plans to go public, even though demand for some of them was said to have been strong.

Kyle Huske, an analyst at IPO.com, said despite the recovery in the markets of late, only the very best, or very desperate companies, like Tyco (TYC Quote - Cramer on TYC - Stock Picks) with its CIT (CIT Quote - Cramer on CIT - Stock Picks) spinoff, are actually bringing new issues to the market.

"It is possible for new issues to price successfully and gain on their market debut," Huske said. But "without a minimum level of investor confidence in the markets, pricing IPOs becomes extraordinarily difficult."

Those companies choosing to price anyway, often must accept reduced valuations and risk having the new shares drop below their offering price on their first day of trading, she added.

The number of IPOs priced so far this year still exceeds last year's deals 56 to 54. But with no deals on tap this week, Huske believes that IPOs this year could fall behind 2001 levels as soon as next week.