DealZone

IPO drought persists in Q1, no rain in sight

March 26, 2009

desertWith just a few days left, the first quarter of 2009 has been as miserable for the U.S. IPO market as the last few quarters were.

The first three months of the year saw one solitary IPO- a grand slam to be sure, an $828 million (including over-allotments) deal by kids food maker Mead Johnson Nutrition. In contrast, the first quarter of 2008, when IPO flow was already starting to fall off a cliff, had 10 deals yield a total of $20.6 billion.

It was the second quarter in a row to see only one deal, the first time such a six-month drought has happened this decade.

(U.S. IPO investors might find some solace knowing things were even worse outside the U.S.- total IPO volume for the first quarter was $510.6 million on 41 deals, down from $15.4 billion from 150 deals in the first quarter of 2008, according to Thomson Reuters data. Ouch.)

But the Mead Johnson IPO was an anomaly: it was spun off by a well known company, Bristol Myers Squibb, and has robust sales in an industry considered relatively recession proof.

Part of the problem is that some companies are still in denial about how much their IPO can raise, leading them to wait for the better times that are taking a long while to get here.

Here’s what Tom Fox, the head of equity capital markets at UBS told Reuters: “With the markets off by 50 to 75 percent, depending on the sector, there’s a recalibration that has to take place. People have to get used to the levels at which stocks are trading and companies being valued at lower levels. That makes it more digestible to think about going out.”

And even with this week’s rally, the markets remain jumpy. The VIX volatility index is still above 40, far above the 20 range many bankers say is conducive to IPOs.

So his outlook is not very promising: “Our expectation is that the earliest we’ll see a more active IPO market is in the fourth quarter. And that presumes companies are ready to press the button in September or October. But it’s very likely we won’t see a truly active market until 2010.”

Sure enough, there were only three new IPO registrations during Q1 (and only one since the Mead Johnson deal), while 14 companies pulled themselves out of the pipeline.

But one of those new registrations, by Changyou.com, a Chinese online game company being spun off by Sohu.com, is set to price April 1. So it may well be that Q2 will see one deal. But maybe one deal only.

(PHOTO: Foreign tourists near Dakhla oasis in Egypt’s Western Desert, in Sept. 2008. REUTERS/Goran Tomasevic)

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