The initial public offering (
) market is now in lockdown. Frozen. Shuttered. Throw away the key.
With all the turmoil roiling the markets, more than 30 companies
have had to step away from the IPO starting line in the last six
weeks. Even if the market turned up sharply right away, it would
take some time for bankers to prime the pump to get these deals
back on the docket. And if the market remains a bit nerve-wracking,
these still-private companies may stay that way for an extended
The IPO shutdown comes as a real disappointment for investment
banks, as these deals, with their 7% commissions, generate
boatloads of profits. That's often how these banks justify
carrying teams of research analysts, who otherwise would not pull
their weight in an era when many clients trade through electronic
networks for almost nothing. In the past, these active clients
would send large trades at five cents a share -- known as "the
nickel business" -- to firms in exchange for analyst research and a
cut of promising IPOs.
These days, analyst research doesn't hold the same respect with
clients, and without the IPO activity to at least provide some
value, the relationship between sell-side departments (analyst
teams at investment banks) and buy-side firms (the hedge funds and
mutual funds that serve as clients) is even further frayed.
The timing is unfortunate. A number of investment banks have just
been getting back on their feet in recent quarters, and analysts
will likely need to start lowering their profit forecasts if the
IPO market remains depressed. For the big banks like
Goldman Sachs (
JP Morgan (
, investment banking fees and research trading commissions are only
a small part of their overall business. But for smaller firms such
Stifel Financial (
Raymond James (
, investors may need to brace for weaker-than-expected results.
Good News for Buyers
Companies that are pushed away from the IPO gate can stay away only
so long. Many times they are funded with the notion that their
original investors will soon be able to recoup their investment.
And if these backers, such as venture capital (VCs) firms, are on
the hook to keep these companies going, they may look for
alternatives. When this has happened in the past, these VCs have
reached out to private equity firms like
KKR Financial (
Blackstone Group (
to take the private companies off of their hands.
But if these stalled IPOs are in the high-tech field, then the
cash-rich large public players also field phone calls. In past
cycles, when the IPO market was closed,
Cisco Systems (Nasdaq: CSCO)
Oracle (Nasdaq: ORCL)
Intel (Nasdaq: INTC)
and others have pounced on small private names, often at fire-sale
Action to Take -->
There is so much to like about tech stocks like these right now.
Many have very strong balance sheets, which can be used to buy back
stock while the market is slumping, or used to acquire these
almost-IPOs. Moreover, tech spending is now solidly rising, if
recent earnings reports are any indication. I am a big fan of
Dell Inc. (Nasdaq: DELL)
, thanks to its balance sheet-led downside support, but all of the
above-noted tech names hold appeal. Conversely, look to trim
positions in investment banks if the IPO market doesn't re-open
before the next earnings season in July.
-- David Sterman
Disclosure: David Sterman owns shares of Neither StreetAuthority
and LCC nor the editor hold positions in any securities mentioned
in this report..
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