By Telis Demos And Corrie Driebusch
U.S. companies are now dropping initial public offerings and
selling themselves at the highest rate in three years. This
underscores the gap between volatile financial markets and a
booming merger business.
While merger-and-acquisition volumes are surging as firms seek
to build scale and boost earnings in a sluggish economic
environment, investors broadly expect markets to be volatile for a
host of reasons. This volatility, which is typically bad for IPOs,
is the result of a likely Federal Reserve rate increase next month,
higher-than-average stock valuations and worries about terrorism
and other so-called geopolitical risks.
As a result, many IPO candidates are getting better offers from
potential acquirers, including strategic rivals and financial
firms.
All told, the dollar volume of U.S. IPOs this year has dropped
63% from the total in 2014 to $36 billion. At the same time, more
than $2.3 trillion worth of merger and acquisition deals have been
announced this year, a record pace that is up 46% from the total
volume of 2014.
"When company owners sell, they take all the market risk off the
table versus an IPO. That's very compelling right now," said Pete
Lyon, co-head of Americas investment banking services at Goldman
Sachs Group Inc.
At least 18 companies have stopped pursuing filed U.S. IPOs this
year because they were being acquired, according to a Wall Street
Journal analysis of Dealogic figures. That amounts to about 10% of
companies that filed for IPOs and either went public or sold
themselves this year.
That's the highest share since 2012 and nearly double the rate
in 2014, when the most offerings since the dot-com boom were
completed, the analysis shows.
The figures could be higher since 2012 due to companies'
confidential IPO filings. That year, the Jumpstart Our Business
Startups Act went into effect, allowing companies with under $1
billion in revenue to initially file confidentially for an IPO.
Petco Holdings Inc. this month agreed to sell itself for about
$4.6 billion to private equity firm CVC Capital Partners Ltd. and a
Canadian pension fund. The company earlier in the year had filed
for an IPO and was seeking a roughly $4 billion value, The Wall
Street Journal earlier reported.
Interactive Data Corp., a financial data provider, and Ballast
Point Brewing & Spirits Inc. this fall also announced they were
selling after earlier filing for IPOs. Other firms also are holding
back on IPOs even without opting for a sale. Grocery chain
Albertsons Cos. and lender LoanDepot Inc. recently postponed IPOs,
citing unfavorable market conditions.
Only seven times in the past 20 years have IPO and M&A
dollar volumes diverged in this fashion, Dealogic figures show,
with one category declining from a year earlier and the other
rising.
Helping to drive some of the withdrawals is the poor performance
of recent IPOs. Through Nov. 20, stocks of companies that have gone
public this year are down on average 2% from their offering price,
compared with a gain of 19% for deals in 2014 through the end of
that year, according to Dealogic.
That has spooked many investors, especially once the stock
market became more volatile this summer, making short-term IPO
performance even tougher to forecast.
As a result, they are asking for big concessions from companies
on price. Of the last 20 listings through Nov. 20, more than half
priced below their projected range, Dealogic figures showed. And
the number of health-care and technology IPOs, often the deals with
the biggest potential gains, has dropped 43% through Nov. 20 versus
the same period last year, Dealogic figures show.
"The event of the IPO now is just not exciting," said David
Rudow, a senior equity analyst at Thrivent Asset Management.
Poor IPO performance has in particular hurt active fund
managers, who are the main buyers of IPOs. Many have lagged behind
the market at a time when index-driven "passive" strategies are
gaining in popularity. Investors pulled a net $125 billion from
U.S. stock mutual funds this year through the end of October,
according to Investment Company Institute, compared with a net $33
billion withdrawn during that period in 2014.
Among active fund managers, "there's been a bit of a buyer's
strike for IPOs," said Joseph Amato, president and chief investment
officer at Neuberger Berman.
Meanwhile, shares of U.S. public companies announcing
acquisitions in deals over $1 billion have risen an average 2% the
day after the announcement, according to Dealogic. That reverses an
average 1% drop over the past 20 years.
To be sure, M&A gains appear to be slowing. For example, the
2% jump this year is down from a 3% jump in 2014 and a 4% jump in
2013.
There are also indications investors are beginning to balk at
buying more corporate debt. Some big acquirers have had to cut
prices on debt they are selling.
Still, at a time when revenue growth is scarce, takeovers will
likely remain popular.
"We are in a low-revenue-growth environment for most companies,
and M&A remains one of the best ways for them to grow earnings,
especially if they can create synergies and cut costs through
mergers," said Chris Bartel, head of global equity research at
Fidelity Investments.
Write to Telis Demos at telis.demos@wsj.com and Corrie Driebusch
at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
November 29, 2015 05:44 ET (10:44 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.