An IPO’s success has little to do with timing

February 18, 2009

An IPO’s successful pricing hinges to some extent on the overall market’s performance that particular day, or so goes the thinking in the world of new issues.

The logic holds that on a bad day, the markets remind potential investors of the risks of a new offering and leads to a lower pricing, if the IPO prices at all.

But that might be overstating the case. During a road show, an IPO’s underwriters spend several days selling the deal to potential institutional investors who have time to take a close look at its particulars and prospects.

On Tuesday, O’Gara Group, a Cincinnati-based homeland security company, shelved its IPO, citing the usual “market conditions.” It hasn’t canceled it altogether, but the deal is off indefinitely.

The news came on a day the Dow Jones fell 3.79 percent, so it might be tempting to blame the market’s dive for the O’Gara deal’s woes.

But O’Gara was initially supposed to price its IPO last Tuesday, on the same day Mead Johnson, the pediatrics nutrition making offshoot of Bristol Myers Squibb, priced a $720 million IPO that exceeded all expectations. That day, the market was even tougher, falling 4.6 percent, so clearly investors were interested in a quality company even as the markets stumbled around it.

O’Gara, which ended up putting off its attempt to price its IPO until this week and lowering the estimated price range last week in a bid to entice investors, has suffered losses for several years and planned to use the proceeds to buy other companies, according to its SEC filing. Hardly a compelling story compared to Mead Johnson’s fat, growing sales.

Turns out an IPO’s chances for success has much more to do with a company’s fundamentals than the market’s vagaries on any given day.

2 comments so far | RSS Comments RSS

Mead Johnson can be considered more of a “Blue-Chip” company given its years of establishement, products and profits track record. It helps that they have a brand-name parent behind them as well.

These inert factors are something that smaller yet profitable companies do not possess and hence, would still require some market optimism (or timing) to pull off their IPO.

Posted by katob | Report as abusive

So there’s the conventional wisdom, and then there are two data points that suggest the conventional wisdom might be wrong? Do you really expect anyone to believe you when you pull two data points? Come on. Go dig some more or else find someone who DID do the research.

Posted by Sam | Report as abusive

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