While the long-dormant IPO market is showing signs of life again, several high-profile candidates for stock offerings have recently chosen to be acquired on the eve of going public.
With markets still choppy, equity valuations well off their highs and deals not the slam dunks they used to be, some companies are finding the option of cashing out preferable to taking chances in the unforgiving equity markets.
In the beginning of July, sneaker maker Converse canceled its plans for an initial public offering, announcing a sale to
Two weeks later, business intelligence software manufacturer Crystal Decisions ditched its IPO for an acquisition by
And last week, White House, a designer of high-end women's clothing, chose to combine with
instead of going out on its own.
"I guess these companies felt that the better value was to sell out now," said Kathy Smith, an analyst at
, a Web site run by Renaissance Capital. "I think that it is an issue of uncertainty in the IPO market. The market is still not a sure thing."
Uncertainty most likely factored into White House's decision to sell to Chico's.
Securities and Exchange Commission
filings, White House had set a price range of $12 to $14 a share for its public offering. Assuming the deal was done at $13 a share -- the midpoint of its proposed range -- the postdeal equity value would have been about $104 million.
Chico's, however, was able to scoop up the retailer for about $90 million in cash and stock. Usually, an acquirer would pay a premium to the equity value of the publicly traded company, since it is getting control.
To some, the fact that Chico's didn't pay a higher price for its acquisition suggests White House may have been worried about how its IPO would have done in the still-volatile equity market. (Neither Converse nor Crystal Decisions had set terms for their deals when they announced their mergers.)
"People are concerned about getting sustainable, high valuations in the market," said Smith.
While IPO activity has picked up lately -- there are currently 21 offerings in the pipeline, according to Dealogic, expected to raise $3.1 billion -- it is likely that fewer than 100 companies will go public this year. The last time that happened was in the late 1970s, according to Thomson First Call.
IPO investors are still shell-shocked from events of the past three years. "They have very high standards for companies going public," said David Menlow, president of
When teen retailer
warned about a loss in its second quarter as a public company last year, shareholders sent the stock into free fall. It didn't get back above its offering price for months.
These days, no hiccup goes unnoticed. Credit card processor
( IPMT) delayed its IPO in May after revelations that an analyst at Bear Stearns, the underwriter, promoted the company in a Webcast.
Moreover, investors in new issues have little patience for pro forma metrics of the past. "Nobody wants to hear about EBITDA or projections," said Menlow. "The emphasis is on profitability."
As a result, less than half of the deals this year have come from the technology sector. Instead, they have favored more humdrum groups, such as health care, real estate investment trusts and commercial lenders.
Small- to midsized commercial lenders such as
, which began trading on Thursday, is a good example of the new class of IPOs.
CapitalSource earned $18 million, or 18 cents a share, in its first quarter of 2003. And the lender was profitable during the two previous years. Its stock closed up 25.5% on its first day of trading.
Although this year's IPOs have performed well in the aftermarket -- they are up, on average, 30% from their debuts, according to Dealogic -- it stands to reason that corporate executives will remain leery of making initial public offerings until they see a sustained improvement in valuations and the market.
"My suggestion to any CEO who wants to do an IPO is to wait," said Menlow. "If the economy is improving, it would behoove companies to hold off for nine months or a year before going public."