The IPO market should build on its current momentum in 2004, after a pickup in pricings at the end of this year and with one of the most widely anticipated offerings in a decade on the horizon in Google. Despite all that, however, it remains too early to declare a full-blown turnaround in the new-issues market. While deal-trackers anticipate that more than 100 new companies will come to market next year -- the first time since 2000 -- that is still significantly below the 500-plus deal watermark set in the heady days of 1999. Perhaps more importantly, IPOs these days have stiffer competition for investors' dollars. "Filings have been on the rise compared to the anemic first-half showing,
but I think that competition from exchange-traded funds, index funds and the existing supply of stock will limit the advance of issuance," said Richard Peterson, an analyst at Thomson Financial. As underwriters rushed to book deals by the holidays, 21 IPOs priced in the first three weeks of December, making it the busiest month in over three years. New issues included the biggest deal of 2003, a $3 billion offering from insurer China Life ( LFC), which has done well in the aftermarket. Other high-profile deals from online travel company Orbitz ( ORBZ) and Korean game manufacturer Webzen ( WZEN) have tumbled from their issue prices. Meanwhile, a few big IPOs crammed into the week before Thanksgiving -- moving company Sirva ( SIR), IT outsourcer Synnex ( SNX) and Pinnacle Airlines ( PNCL) -- still are trading below their opening levels. Next year, experts predict offerings from a broad range of sectors, including financial services and technology. They say the market will be wary of biotech issues, though, after several recent flops. Paul Bard, an analyst at IPOHome.com, said growth companies in the technology sector could again start to dominate, following successful deals from Callidus Software ( CALD) and entertainment-equipment maker Digital Theater Systems ( DTSI). Each of those stocks is up since its debut. Each of those firms was also recently profitable -- a trend that is likely to continue to make or break public offerings in 2004. "IPO investors are looking for the kind of growth they have not been able to achieve in the broader market," said Bard. "But they also want to see companies with a track record -- several quarters of top-line growth and earnings."
FormFactor ( FORM) is an example of the new breed of IPO that Wall Street seems to appreciate. The semiconductor-equipment manufacturer had double-digit revenue growth when it went public last June, and it also had been making money in each of the last four years. Shares are up approximately 30% since the offering. Investors have high hopes for an offering from Web search engine Google. "It would be reminiscent of the Netscape IPO," said David Menlow, president of IPOFinancial.com. Before being acquired, shares of Netscape were up 250% from their issue price. The stock's meteoric rise is viewed as the first puff of air into what became the Internet bubble. That Google would be able to mimic that kind of performance in this day and age, some believe, is unlikely. It also may be undesirable. "Google is being hyped too much," said Bard. "Investors are comparing it to eBay ( EBAY), Amazon ( AMZN) and Yahoo! ( YHOO). But it would be coming public as a much more mature company. "That does not mean the stock could not generate strong returns," he added. "But I do not think it would offer the value creation that eBay, Amazon or Yahoo! did." Elsewhere, the IPO market will see a number of spinoffs next year. "A lot of large companies are stripping out noncore assets as they try to unlock value," Bard said. Motorola ( MOT) has set plans to separate its semiconductor operations into a public company. And General Electric ( GE) is looking to spin off its life insurance and mortgage divisions. Meanwhile, a slew of China-related companies are expected to come public following the recent China Life and CTrip.com ( CTRP) listings. "I would expect more China-based IPOs, as the economy there has cranked up and the business environment is healthier than it was a few years ago," said Francis Gaskins, editor of IPODesktop.com. "There is also greater transparency in income statements." In 2004, investors are likely to get new rules from the NASD on how IPOs are sold. In November, the NASD announced several proposals. One would require underwriters to disclose allocations to issuers. Another reform would prohibit brokers from accepting a market order for one trading day after the company went public. Back in the day, investors who placed market orders on a stock's first day often wound up buying shares at the height of an explosive rally, only to watch them drop off later. "This is a step in the right direction, but more needs to be done," said Bard. "We have always talked about disclosing allocations to investors and about making road shows available to the public. We'd also like to see changes highlighted in an amendment to a prospectus. Why not make that easier for investors?"