An IPO reality check

September 25, 2009

The IPO market is back — back from oblivion, at least.

In the past month there has been a flurry of initial public offerings in the United States, as private companies and their backers try to take advantage of a rebounding stock market. Today, the biggest IPO of the year began trading after online videogame operator Shanda Games of China raised $1 billion — more than most had expected.

But this recent euphoria for newly minted shares is hardly the start of some IPO frenzy.

Shanda, despite pricing at the top of the projected range, fell flat in its first day of trading, with its stock dropping as much as 9 percent below its $12.50 offering price. (See my blog.)

And by historical standards, the number of new stock deals is small. To date, there have been just 28 deals coming to market, compared with 169 IPOs in 2007, according to Thomson Reuters. In 2004, there were 216 IPOs. Even in 2002, in the aftermath of the bursting of the tech bubble, 80 companies went public.

Sure, most of this year’s IPOs are trading above their offering prices, with baby formula maker Mead Johnson Nutrition Co. and Shanda competitor registering particularly healthy post-IPO gains. But all seven real estate-related deals to come to market have been duds, trading below their offering prices.

It seems that concerns about rising defaults on commercial real estate mortgages are creating too much of a headwind for any real estate investment trust coming to market. Savvy investors would be wise to stay clear of any new REIT deals, or at least wait to pick up shares in the aftermarket.

Still, there is some decidedly good news on the IPO front — especially for stock flippers. This year, the average IPO is posting an 11 percent gain over its offering price, according to Thomson Reuters. That’s more than double the first-day pop registered by IPOs in 2008. And it’s the best average first-day performance since 2001.

Then again, Shanda’s troubling out-of-the gate performance could be an indication that investors can’t even count on a decent first-day pop anymore.

It took the IPO market a good three years to recover from the bursting of the tech bubble. And the damage from that market event is nothing compared with the fallout from the current financial crisis.

The message here is when it comes to IPOs, everyone needs to take a deep breath and curb their enthusiasm.

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