Weekly Corporate Growth Report: A Profitable Year for Initial Public Offerings

After a slow start, 2004 turned out to be a good year for initial public offerings. Due to a considerable increase in offerings in the last quarter, 2004 ended with IPO volume roughly triple that of 2003. Europe is seeing a similar boom. IPOs have not only been numerous, they have also proven to be profitable.

As of late December, research firm Dealogic tallied 276 initial public offerings in 2004, raising a total of $54.52 billion. This is an impressive increase compared to the same period in 2003, which saw 84 IPOs, raising $18.02 billion. The week of December 13, 2004, saw 20 offerings come to market, making it the busiest single week for IPOs since August 11, 2000, according to data from Thomson Financial.

The large amount of capital raised by IPOs in 2004 is due to the number of offerings rather than their size. There were only eight companies that raised more than $ 1 billion and no deals valued at more than $3 billion. Still, IPOs have clearly been profitable. The year's average offering rose 29 percent. Some impressive offerings fared even better. The share price of Chinese entertainment company Shanda Interactive has nearly quadrupled since its debut in May. Google, probably the most famous IPO of 2004, has more than doubled since it's August offering. According to Barrons, Google's offering ranks 17th in terms of performance for the year.

The leading US IPO for 2004 was Las Vegas Sands Corp., according to Financial Wire. As of mid-December, the casino's offering beat Shopping.com for the position by reaching a 62.6 percent increase over its initial offering price.

IPOs in 2004 covered a range of industries. According to ipohome.com, healthcare and biotechnology firms accounted for 23.3 percent of the year's offerings. Technology companies accounted for 21.9 percent and financial companies for 19.5 percent.

Several factors contributed to the increase in IPO activity. Volatility has been low, and investors have had cash on hand. A broader stock market rally occurred following the results of the presidential election, which no doubt contributed to the increase in IPO activity late in the year.

European public offerings topped 132 billion euros, a 60 percent increase over 2003, according to preliminary data from Dealogic. Taken together, offerings from Europe, the Middle East, and Africa exceeded those in the US for the third time in five years. The total value of the IPOs from these regions, however, lagged behind both the Asia-Pacific region and the US, due to the continuing sales of stock from listed companies.

Whether 2005 will continue the positive trend is difficult to predict. Traditionally, market activity slows around the winter holidays, making a direct continuation from one year into the next unlikely. Furthermore, the Securities and Exchange Commission is considering new rules governing the way initial public offerings are handled. The degree to which the new rules, if they are enacted, will impact offerings remains to be seen.

The SEC is considering revisions to the rules that govern the "quiet period" during which companies that have filed to issue IPOs are limited in their ability to discuss the company publicly. Last year, Google ran afoul of the current regulations when a Playboy interview with the company's founders was published during Google's quiet period. To avoid penalty, Google was forced to refile its offering documents to include the text of the article. When a profile of salesforce.com chief executive Marc Benioff was published in the New York Times, in addition to forcing the company to refile, the sec imposed a 30-day "cooling off period during which salesforce.com couldn't market its offering.

The new revisions under consideration would create a major reform of the way companies involved in IPOs could communicate with the public, allowing for much broader dissemination of company information than is currently allowed. Under the proposed rules, press interviews would be allowed provided the company files published articles with the SEC soon after they are completed. The press would also be allowed to attend the marketing roadshows companies use to promote their IPOs to investors.

The degree to which such changes could affect the IPO market is difficult to predict. It is likely that, even under the new rules, companies would limit their disclosures to avoid potential liabilities, at least until they have become more accustomed to the new deal environment. Regardless of whether the new SEC rules are enacted, if 2005 shows as many profitable IPOs as 2004, it will be a very good year.

Sources: CFO.com, FinancialWire, Wall Street Journal

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By Andrew Dolbeck

Editor