Business Insight Zone

On Friday I mentioned my appearance on Bloomberg TV, in which I discussed the IPO market for the first quarter of 2008, and where I think the IPO market may be headed for the rest of the year. The Bloomberg host seemed disappointed that I wasn’t more sanguine, but right now I just don’t see much reason for optimism about the IPO environment.

Reasons Not to Be Optimistic about IPOs:

>> We’ve been seeing few new IPO filings from week to week, and there’s a large backlog of filings from earlier quarters for companies that have either withdrawn or indefinitely postponed their IPO plans. So even without any prognostication, we can conclude that potential IPO companies and their financial advisers are leery of going forward with these plans.

>> In general, unless you have a history and brand position like Visa’s or Google’s, you want to approach the IPO market when investors are ready to give your company a charitable hearing — or at least a fair hearing.* Right now, economic jitters have made a lot of investors skeptical about the equity markets. That’s bad news if you want to come forward with an IPO.

>> If you’re a run-of-the-mill company, it’s bad news if you coincidentally launch an IPO on a day when the markets as a whole head way south. Days like that are hard to predict, but they’re much likelier under current market conditions, when the major U.S. stock indexes have dropped 5 – 12% over the past six months.

>> While the markets are having some good days — Friday was one — economic indicators have been all over the place. Housing starts? Bad. Price of oil? High. Ongoing problems in the financial sector? Moderate to severe. And so on. Under conditions like these, it’s very hard for IPO underwriters to launch IPOs with any confidence. You don’t have to believe that we’re on the verge of economic disaster to take the position that it’s a bad time to make an IPO.

A Financial Parable

All of this logic can be summarized with an analogy about the time value of money — one that relates to the gorgeous cars in the picture above:

Let’s say you own a vintage car that’s worth at least $150,000, and you want me to sell it for you. I’m honest with you, so I tell you that if we auction it today, there’s a 50% chance you’ll get $150,000 to $170,000 for it, but also a 50% chance that you’ll only get $120,000 to $140,000 for it.

Then I tell you that, in my professional judgment, if you’re willing to wait until the end of this year or the middle of next year, there’s a good chance you can get $250,000 for it, and a great chance you can get at least $180,000 for it.

What would you do? Unless you’re strapped for cash, you’ll probably hold onto the car. It’s worth it to keep the car under wraps in a garage for a year so you can command a premium between 20% and 70% for it.

In my view, that’s what’s happening with the IPO market, and that’s why we won’t see a lot of IPO activity before the markets (and federal regulators etc.) resolve at least some of today’s economic uncertainties.

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* In fact, this concept applies just as much to Visa, Google, Blackstone, MasterCard, et al. But these companies are able to command investors’ attention in any sort of market weather.

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Related posts:

• IPO Scorecard for Q1.
• Visa’s IPO: Into every howling stormfront of financial doom a ray of the purest sunshine must fall.
• The IPO market and the NetSuite IPO.

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(Picture of vintage autos from the awesome Marcin Wichary; stock chart from Google.)

Category: Economics, IPOs