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US IPO Recap: Candy Crush, year's largest tech IPO, crashes

Posted
3/31/2014 9:11:00 AM
By: Renaissance Capital
Referenced Stocks:KING;WATT;IMS;LQ;ALLY

Last week's headlines were dominated by Candy Crush-related puns describing King Digital Entertainment's ( KING ) record-breaking fall  in first-day trading for a company of its size. King has traded down further since its IPO, making it the tenth out of 10 tech IPOs this year to see negative aftermarket trading . One of the smallest tech IPO of the year to list on a major exchange, Energous ( WATT ), managed a 76% first day pop even as investors appeared to exercise more price discrimination toward high-risk companies. Average deal sizes are increasing based on the diverse group of 11 IPOs that set terms last week, including IMS Health ( IMS ), La Quinta ( LQ ) and the US Treasury's offering of Ally Financial ( ALLY ), all of which are raising at least $700 million. The quarter now concludes with more than double the IPOs of the 1Q13 . And signaling that the IPO window is still wide open, March saw the most initial filings (41) since May 2004 .

Tech returns vary in 11-IPO week
Possibly fearing that King Digital would follow Zynga's post-IPO trajectory and turn into a one hit wonder, investors rejected the company's $7.4 billion valuation, pushing the stock down nearly 16% on its first day. Poor first-day trading is not unusual for the biotechs that have characterized the quarter, but it is rare for a deal of King's size. Investors were more favorable toward the idea of eliminating electronics' charging cables, demonstrated by the 76% spike of Energous on Friday. That puts the year's smallest major tech IPO in the dubious company of Castlight (CSLT), Varonis (VRNS) and Coupons.com (COUP), which had terrific first day returns but have since fallen 46%, 20% and 15%, respectively.

CBS Outdoor (CBSO) completed the week's largest IPO, raising $560 million. The CBS spinoff hopes to provide stable gains as it enhances the technology of its billboards, but its modest first-day gain (5%) may have reflected concerns about its ability to qualify as a REIT. TriNet (TNET), which allows small and mid-sized companies to outsource their human resources department, had the second-best return of the week, rising 33%. Nord Anglia (NORD) operates premium private schools, mostly for expatriates who want a quality English education for their children in a foreign country. These three companies represented the first business services IPOs of the year, and each has established operations with relatively strong cash flow. Similar in purpose but counted as a tech offering, 2U works with universities to produce equivalent online degree programs. Last week also produced IPOs from a REIT (the year's first), a commercial bank for venture firms and a publisher of digital wellness media.

IPO pricings (week of March 24, 2014)
Company (Ticker)                                      Business                                                                                   Deal Size ($mm) IPO Price vs. Midpoint Return as of 3/28
Energous ( WATT ) Wireless charging technology $24 0% 76%
TriNet Group (TNET) Outsourced HR to businesses $240 0% 33%
Nord Anglia Education (NORD) Private schools teaching grades K-12 $304 0% 23%
Applied Genetic Technologies (AGTC) Biotech: gene therapy for orphan eye disease $50 -14% 21%
Square 1 Financial (SQBK) Commercial banking for venture firms $104 13% 14%
2U (TWOU) Online degree programs at nonprofit universities $119 8% 8%
CBS Outdoor Americas (CBSO) Spinoff of CBS outdoor advertising division $560 4% 5%
Bluerock Residential Growth REIT (BRG) Owns nine apartment properties in the Southeastern US $48 -3% 0%
Aerohive Networks (HIVE) Cloud-based networking solutions $75 0% 0%
Everyday Health (EVDY) Publishes health and wellness media $100 0% -4%
King Digital Entertainment ( KING ) Mobile and social game developer $500 0% -20%

The US Treasury launches its upcoming IPO of Ally Financial 
After bailing out Ally Financial in 2009 with about $17 billion in TARP funds (and receiving $15 billion back since then), the US Treasury now plans on selling the majority of its stake in the company. The long-awaited IPO first filed three years ago today and is expected to raise $2.5 billion. Pricing next week, it will be the year's largest IPO, topping that of other auto loan originator, Santander Consumer ($1.8 billion raised; SC). IMS Health is a significant IPO planned for trading this week. Its cloud-based platform, which provides health care companies with cost-reducing analytics, has made it a dominant player in the market. La Quinta ( LQ ) rounds out the group of large IPOs that set terms, and its $725 million IPO will make it the third and final hotel chain in Blackstone's portfolio to go public following last year's offerings from Extended Stay (STAY) and Hilton (HLT).

GrubHub's well-known food delivery service will draw media attention as the company also plans its IPO for this week. It merged with Seamless last year to become the only one of its type with such an expansive reach and reputation. Stalwart Tankers (STST) will try to reach its $150 million deal size target in spite of difficulties for two other recent transportation IPOs. CHC Group (HELI) has fallen 27% since its January IPO, and tanker company Diamond S Shipping postponed its IPO in early March. The week's two SaaS companies setting terms, Opower (OPWR) and Five9 (FIVN), focus on helping companies provide better customer experiences.

IPO terms filings (week of March 24, 2014)
Company (Ticker)                                          Business                                                                                                            Deal Size ($mm) LTM Sales ($mm)
Ally Financial ( ALLY ) Global auto finance company $2,518 $4,263
IMS Health ( IMS ) Health care data and consulting services $1,268 $2,544
La Quinta Holdings ( LQ ) Blackstone-backed US select service hotels $725 $874
Stalwart Tankers (STST) Formed to acquire and operate chemical tankers $150 $26
GrubHub (GRUB) Online portal for food delivery $148 $137
iKang Healthcare Group (KANG) Private medical centers in China $142 $191
Opower (OPWR) SaaS for utilities to help consumers cut power costs $110 $89
Five9 (FIVN) SaaS for company call centers $100 $84
Farmland Partners (FPI) North American farmland property REIT $70 $2
Corium International (CORI) Pharmaceutical company developing adhesive drugs $61 $48
Adamas Pharmaceuticals (ADMS) Biotech: treatments Parkinson's and Alzheimer's $51 $71

Box fits into the pipeline as 10 filings seek $1.9 billion
The IPO market's most well-known boxing match just kicked off as cloud-based enterprise storage provider Box (BOX) filed for a $250 million IPO, ahead of the expected filing of the increasingly business-focused Dropbox. ServiceMaster (SERV) should return to the public market after its $4.7 billion LBO by CD&R in 2007 valued the company at $5.5 billion with debt. The company shed its TruGreen lawn care service in January, and now focuses primarily on pest control and consumer warranties. The Dominion Midsteam Partners (DM) spinoff follows the early February filing of Antero Resources' midstream energy asset spinoff (AM). Mercury Payment Systems sells technology that retailers use to process electronic payments. And TubeMogul's (TUBE) initial filing comes just as another major adtech company, The Rubicon Project, prices tomorrow. SIRVA is a major provider of employee relocation services like moving, cultural training and legal processing. It might even enroll an expat's children in a Nord Anglia school.

IPO initial filings (week of March 24, 2014)
Company (Ticker)                                                       Business                                                                                                     Deal Size ($mm) LTM Sales ($mm)
ServiceMaster (SERV) CD&R-backed building maintenance $500* $2,293
Dominion Midstream Partners (DM) Liquefied natural gas midstream assets $400 $344
Mercury Payment Systems (MPS) Payment processing services for businesses $300* $237
Box (BOX) Enterprise cloud-based storage platform $250 $124
SIRVA (SIRV.RC) Relocation services for employees $175 $1,994
TubeMogul (TUBE) Platform for managing digital video ad campaigns $75 $57
Ariosa Diagnostics (AROS) Non-invasive genetic tests for expectant mothers $69 $53
Syndax Pharmaceuticals (SNDX) Biotech: epigenetic therapy for resistant cancers $69 $0
Mapi-Pharma (MAPI) Biotech: enhanced generic drugs $49 $0
CBD Energy (CBDE) Australian downstream renewable energy $14 $70
*RC estimate

IPO market snapshot
So far this year, 63 IPOs have raised $10.6 billion and produced an average first day return of 19%. The Renaissance IPO ETF (symbol: IPO ), a cap-weighted basket of newly public companies and indicator of post-IPO performance, has gained 1.4% compared with 0.5% for the S&P 500. Over the last 30 days, the IPO ETF has fallen 6% compared with a flat S&P 500, as equity market concerns catch up with the initial valuations of untested public companies. The active IPO pipeline includes 119 companies looking to raise a total of $32.3 billion.