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Are IPOs Poised for Another Banner Year?

Initial public offerings hit the market in 2007 at a pace not seen since the go-go days of the Internet boom, and IPO experts believe there could be more of the same in 2008.

"The general tenor of the marketplace for 2008 is encouraging," says Richard Peterson, director of capital markets for Thomson Financial.

Peterson and other IPO watchers qualify their optimism by noting that public offerings would suffer if the U.S. economy were to dive into recession. (Like others quoted here, Peterson was interviewed in December, prior to markets sinking after Christmas.) Otherwise, they believe a revival of technology IPOs and an influx of foreign-company IPOs should keep U.S. investors busy in 2008.

IPO volume in 2008 should be "at or above" the turnout for 2007, barring a recession, says Kathleen Smith, a principal at Renaissance Capital , a Greenwich, Conn., firm that tracks public offerings.

The number of IPOs reached 234 in 2007, up 18% from the previous year and the best showing since 2000, when 406 companies went public, says Renaissance Capital. Companies going public raised $53.6 billion last year, the best result since $97.4 billion was raised in 2000.

"We are now seeing technology asserting itself," Smith says. "The bread-and-butter of IPOs is technology and emerging growth companies." She predicts technology and energy companies -- traditional exploration, development and service firms -- will be the most popular IPOs in 2008. Technology accounted for 26% of 2007's IPOs, followed by health care (20%), energy (15%) and finance (13%).

The quality of the deals was better in 2007 vs. recent years, says Scott Sweet, managing director of IPO Boutique in Lutz, Fla., which analyzes the performance of initial offerings. He adds that last year's IPO volume was aided by underwriters' desire "to do as many deals as possible to augment their trading revenue," given the financial setbacks caused by the subprime-mortgage debacle and a softness in merger and acquisition activity.

Companies needed firm financial foundations to go public, especially when markets slumped from mid-July to mid-August and from mid-October to late November. Still, 79 companies went public between October and December, the best fourth-quarter performance since 1999, says Renaissance Capital.

Deal activity in 2007 was helped by foreign companies, most notably Chinese names, going public. Foreign companies accounted for a record 24% of total IPO proceeds in the U.S.

The number of foreign IPOs climbed to 55 last year from 34 in 2006. Renaissance Capital forecasts a continuing flow of Chinese IPOs leading up to the 2008 Summer Olympics. China accounted for 30 IPOs in 2007.

"For most of the year, these Chinese deals were like gold," says Sweet of IPO Boutique. He predicts fewer Chinese IPOs in 2008, but that doesn't mean underwriters won't try.

Sweet's formula for a successful 2008 combines economic stability with the ability of IPO candidates to demonstrate rising sales, increasing profits or decreasing losses.

"You need a large amount of speculation that these growth companies are worth buying instead of the established companies that have been hammered" in recent months, Sweet says.

Peterson, of Thomson Financial, expects a healthy showing of IPOs from Asia and Eastern Europe this year. An early indicator will be how well investors respond to big offerings such as Visa, the credit card company, and KKR, the investment management firm. Visa filed its intent to go public in November and KKR filed in July.

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