With its regular August hiatus approaching, the US IPO market began stumbling last week. Only two deals, Eloqua (ELOQ) and Globus Medical (GMED), priced while an equal number withdrew. In the shadow of the busiest week since March (7 IPOs priced during the week of July 23), half of last week's expected deals, including online legal service LegalZoom.com (LGZ), were delayed or postponed. Newly formed real estate company Aina Le'a (AINA) ended a two-week filings drought, but with only 10 for the month, it was the slowest July for filings since 2003. Although confidential filings under the JOBS Act have played a role, we do not think they fully explain the slowdown and we speculate that activity has decreased.
Valuation pressure strikes
Recent deals have faced considerable valuation pressure, and over a third have priced below the range in the past month. Although Eloqua, an on-demand marketing software company with healthy 25% growth, priced at the high-end of its range on Tuesday, it was valued at a discount to its SaaS peer group. On-demand supply chain software company E2open (EOPN), which priced the week before and fell 9% on day one, had been priced in line with its SaaS peers despite uneven historical growth. Prior to E2open, all five of the year's on-demand companies had priced above the range, many at premium multiples.
LegalZoom.com, which, like Eloqua, offers 20%+ growth and expects to expand margins, was being pitched at a premium to many other online subscription services. The postponement may have reflected management's unwillingness to accept a similar discount. Spine implant provider Globus Medical, which priced on Friday after slashing its valuation by over 30%, rose 13% on its first day. Eloqua gained 12% on its first day and rose another 16% on Friday to finish the week up 30%.
Paying for growth
While the recent pricings may indicate increased price sensitivity from IPO buyers, not all companies have needed to yield ground on valuation. The past month's top two performers, Five Below (FIVE) and Palo Alto Networks (PANW), both priced at premium multiples and above upwardly revised ranges. The keys for both were unique concepts and extremely fast growth, over 50% for Five Below and more than 100% for Palo Alto. At the end of last week, Five Below and Palo Alto were up 75% and 30%, respectively. The strong investor appetite for growth was also reflected in the July 19th withdrawal of guitar maker Fender Musical Instruments (FNDR), whose famous brand name failed to overcome tepid growth prospects.
The 16% total return for IPOs in the past month is well above the S&P 500 return (0.1%) over the same period and exceeds the 12% year-to-date average. While most of the performance was captured on day 1, the 2% average aftermarket return represents a strong bounce back from negative returns year-to-date. More than 75% of the deals, versus 63% year-to-date, are trading above their offer prices.
Five new deals coming next week
Five companies will try to achieve similar results next week. Restaurant companies Bloomin' Brands (BLMN) and CKE (CK), both of which are returning to the public markets after being LBO'd by large private equity firms (Bain and Apollo, respectively), will seek a total of $500 million dollars in proceeds. Performant Financial (PFMT), a debt collection agency, is hoping to raise $150 million, and wireless-focused Peregrine Semiconductor (PSMI) will be the first attempted chip deal since Audience (ADNC) in May 2012. Finally, Manchester United (MANU), a storied English soccer club, will look to capitalize on its 659 million worldwide supporters in a $300 million deal. If it prices at the midpoint, its $3 billion market cap would make it the 7th largest IPO of 2012. If all deals price, the US market will have seen 91 IPOs so far in 2012, just shy of last year's total before the IPO market experienced a long, 2-month dry spell.
