IPO’s Offer Mixed Bag of Results

The market melt-down caused a significant decline in the number of IPO transactions over the past two years.  While a typical year used to include more than 200 major offerings, there were less than 50 such offerings in 2008 and so far I count 44 major transactions for 2009.  However, the pace of deals has picked up as markets once again offer liquidity and private equity investors and corporations are using that liquidity to cash out and raise capital.

The health of the most recent deals will have a major affect on both the pricing and frequency of upcoming deals.  If investors are willing to take on risk and the market has a speculative tone, then underwriters will likely have little trouble in pricing deals and getting top dollar for the selling shareholders.  But as we start to see a shift to more caution on the street, underwriters will have to adjust terms in order to get shares sold.  This doesn’t necessarily mean the rate of deals will decline, but it may mean that sellers will have to settle for lower prices and for selling smaller allocations in order to match market demand.

Dole Food Company Inc. (DOLE) was able to raise $419 million in its most recent transaction, netting the underwriters more than $26 million in fees.  The stock met selling its first day of trading with the IPO price of $12.50 quickly shunned by investors.  The majority of the capital is expected to be used to pay down the company’s debt which is likely to be a wise move given the uncertainty surrounding capital markets and the company’s interest expense.  However, investors appear to be worried that a faltering economy could still pressure shares and without earnings growth, the debt repayment will do little to add to shareholder value.

On a more positive note, Verisk Analytics Inc. (VRSK) was offered to the public at $22.00 and has quickly traded higher offering the IPO investors a handsome profit.  The risk management and analytics company is broadening its customer base to extend beyond its roots with insurance companies and should be able to grow revenue and earnings steadily in future quarters.  While the stock has pulled back a bit in the last week of trading, it is still 24% above the IPO price which is encouraging for the IPO market.

The most anticipated upcoming IPO is undoubtedly Hyatt Hotels.  Barron’s had a scorching article on the company this week including information surrounding the family squabbles which have plagued this closely held company for years.  The company is expected to offer 38 million shares to the public between $23 and $26 per share, valuing the entire firm near $4.1 billion.

Investors could justified in concern over the Pritzkers dysfunctional management of the company, especially considering that the family will retain voting control over the company through the use of two classes of shares representing ownership of the company.  The public will be issued class A shares, while the family will retain class B shares for their continued ownership.  The class B shares have 10 votes for every vote class A shares have which means that for the foreseeable future, the family will retain control over Hyatt.  Institutional investors will likely bulk at such a stipulation, which will likely lead to a lower share price than would be reasonable if the company were controlled equally by investors.

Although there are negative issues surrounding the deal, Hyatt has a strong brand, a full portfolio of attractive properties, and a top tier underwriting firm.  Goldman Sachs (GS) will likely pull out all the stops in order to get this deal priced and trading attractively.  I would not be surprised to see the company buying shares heavily after the deal to prop up the price and maintain that the deal was positive.  This would give the Pritzker family more confidence in the investment bank so that when it is time for round two of selling (a secondary offering) Goldman will get the deal and collect the fees.

I would keep indications low if you intend to participate in the IPO.  While profits could be substantial if Goldman does a good job, the risk in this offering is higher than normal.  I would prefer to allow the stock to start trading and establishing a pattern before committing capital.

FD: Author does not have a position in any stocks mentioned.

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