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Friday, September 16, 2011

IPO pipeline backs up as companies wait to dive in.

USA Today
by Matt Krantz
Sept 15, 2011

The pipeline is clogged with companies waiting to go public — and there's no sign of the blockage being removed.

There are more than 200 IPO hopefuls in the deal pipeline, the first time in a decade that so many companies have been waiting for their turn to tap the public markets, Renaissance Capital says.

IPO pipeline backs up as companies wait to dive in.

The fate of these companies in waiting is critical because many need new capital to grow, expand and hire new employees. Whether investors will digest such a huge slate of companies will be a big test of the resilience of the stock market, which is still trying to find its footing after the summer sell-off.

"Companies keep filing for IPOs, but also waiting (for the deals) to get done," says Richard Peterson of Standard & Poor's Capital IQ.

There are a number of reasons for the IPO market's major case of constipation, including:

• The stock market is stalled. Given the broad stock market's woes, investors haven't had much appetite for IPOs. Just four IPOs began trading during the market's turbulence in August, Renaissance says, down from 13 IPOs in August 2010. And no IPOs have started trading in September.

Many companies have delayed their deals, and some IPOs just appear to be gummed up. Online social-networking site Facebook and online gaming site Zynga are reported to have put off deals. High-profile offerings of Toys R Us and GameFly have been stuck in the pipeline for months. And other IPOs are waiting for an opportune time to make their debut. "Given the volatility in the markets, many are still interested in going forward with IPOs, but waiting for more favorable pricing," says Stephanie Chang of Renaissance.

• Companies keep filing. While the IPO market appears stuck, that's not stopping companies from being hopeful. So far this year, 210 companies have filed plans to go public, exceeding the 204 that filed during the first nine months of 2010. This supply of deals keeps the pipeline filling up.

The fact bankers are still so willing to file IPOs shows they expect the market to turn, says John Fitzgibbon of

• Recent deals have performed poorly. Investors remain skeptical of companies since the recent track record hasn't been great. The FTSE Renaissance Capital IPO index is down 18.3%, trailing the S&P 500's 3.9% decline. Meanwhile, 38% of the 72 recent IPOs to report second-quarter earnings have missed expectations, Peterson says. That's well above the 21% of S&P 500 companies that missed forecasts.

Yet, IPO investors tend to have short memories. Once the broad stock market starts to behave better, investors will be more willing to take a flyer on the new companies in the pipeline hoping to go public, Chang says. If the broad market perks up more, expect a deluge of IPOs in a month and a half, Fitzgibbon says. "It'll be a hell of a November if it works out," he says.