Cover Story
Cover Story
December 22, 2003
By JACK WILLOUGHBY
SEEMS LIKE OLD TIMES -- in Silicon Valley, Wall Street and the fertile expanse between. The economy is showing renewed vim and vigor. The Dow Jones Industrials are back in Five-Digit Land. And the Nasdaq Composite, home to sundry spirited technology stocks, has rallied more than 40% since the year began.
But nothing tops the revitalized market for new stock issues in evoking good times past. With a fourth-quarter spurt in initial public offerings -- including a sizzling duo from China -- Wall Street’s underwriters have announced they are open for business again. And business -- lots of it, from Internet offerings to mammoth spinoffs to privatizations of state-run properties in Europe and Asia -- is what they expect to see as 2004 unfolds.
Prospective issuers, or their bankers, have been hitting the highways and flyways in recent weeks to pitch forthcoming deals. Indeed, for IPO-market veterans like Tyler Dickson, head of global equity capital markets for Citigroup, it’s beginning to feel like reunion time on the road-show circuit. Dickson reports seeing many of the “same old faces” from the boom years of the late 1990s at recent share-allocation meetings. And they’re smiling again, despite a three-year drought.
For all of this year’s 11th-hour frenzy, 2003 marked the worst IPO market, in volume terms, in almost a quarter-century. Only 73 deals went public in the U.S. through Dec. 12, raising $15 billion in proceeds, compared with 86 deals that raised $27 billion in 2002. To put ‘03’s diminished activity in further perspective, a record 864 companies went public in 1996, while annual proceeds peaked at $80.5 billion in 2000.
Beyond the shadow backlog looms something even larger, or at least more exciting: a potential filing for Google, which has gathered cheerleaders from the Valley to the canyons of Lower Manhattan. The Mountain View, Calif.-based Internet search-engine firm is expected to offer at least $2 billion of stock in the early part of 2004, which would value the company at about $20 billion.
Better yet, say venture capitalists, investment bankers and expectant corporate chiefs, Google’s debut could open the floodgates to a torrent of tech IPOs. Some have even gone so far as to call a prospective Google filing “Son of Netscape,” a reference to Web browser Netscape Communications’ landmark offering in 1995. Netscape’s shares shot up 108% to 58.25 in their first day of trading, and the IPO market -- and the Internet -- haven’t been the same since.
Although this year’s market for new stocks is but a distant echo of 1999’s, the tone is much improved from just a year ago. In 2002 the average IPO fell in sympathy with the broader stock market. In 2003 the average deal rose 4% in first-day trading and 15% in aftermarket action. “This tells us there is real momentum that’s going to keep the IPO market hot for the first months of 2004,” says Kathleen Smith, co-founder of Renaissance Capital in Greenwich, Conn., which operates the IPO Plus Aftermarket Fund.
Profits drove the most successful offerings, in contrast to the late, great bubble market. More than half of this year’s issuers boasted earnings, while the best performers generated ample cash flow.
In another sign of renewed muscle, many issuers raised their indicated filing prices, and the number of shares they planned to offer, between filing and pricing dates. The average new-issue price rose 12% before the shares were floated, reminiscent of 2000’s heady market. Last year the average deal shrank 4% in price, according to Dealogic.
Wall Street’s syndicate chiefs also seem to be sculpting deals to move. The average IPO took only 39 days to come to market in 2003, just six days more than in ‘99. Last year it took nearly two months to price a registered deal, and in 2001 it took about three months to whet buyers’ appetites.
One money manager attributes the collapsed timeline to the dearth of attractive issues in the past few years and to a weak merger market, which have curbed opportunities for profits. “Starvation has made institutional buyers hungry,” he says.
They’re especially hungry for Chinese food. This year’s biggest IPO came fromChina Life Insurance, which this month raised $3 billion globally, including the sale of 162 million American depositary shares at 18.68 apiece. (Each ADS equals 40 Hong Kong-listed shares.) The stock rose 27% to 23.72 in Wednesday’s trading, bestowing upon the company a market capitalization of about $15 billion. Although China’s largest life insurer has penetrated just a small slice of its home market, its shares already look too pricey to some U.S. investors. China Life sells for 18 times next year’s expected earnings of $1.36 an ADS and for two times book value, almost 40% above the valuation accorded other insurers, says New York-based Argus Research.
Investors also gobbled up an earlier offering forCtrip.com International, a Shanghai-based online travel service that priced 4.2 million American depositary shares Dec. 8 for 18 apiece. In the aftermarket, buyers swallowed it whole; Ctrip.com rallied 88.5% to 33.94 on its first day in public hands -- the best first-day finish since November 2000.
Yet investors greeted last week’s 12.18-million-share offering of Orbitz, the No. 3 online travel site in the U.S., with jeers instead of cheers. The stock priced at 26 and rallied 18% Wednesday, before falling 4%, to close at 24.98.
There are plenty of reasons to handle Orbitz with care, not least its heady valuation; the company sells for six times sales and hasn’t much in the way of earnings. But the market’s divergent response suggests something more. “The overwhelming success of the China Life offering [suggests] China could be the one-word answer to new issues,” says Timothy Gould, managing director of equity syndicate for Lehman Brothers, which participated in the underwriting. “For now, the Chinese mystique and the size of the opportunity has captured investors’ imaginations.”