Featured IPO
Week of 9/1/08
Previewing the IPO Pipeline
Filing activity perks up as "Big" and "Green" deals prep for IPOs
A disappointing summer in the IPO market is drawing to a close, but our latest survey of companies in the pipeline offers some bright spots as we head into the fall. Filing activity has been abnormally high relative to the level of successful IPOs, supporting a deal backlog much larger than it was at the bottom of the 2001 to 2003 IPO drought. As of August 28, the IPO backlog (excluding SPACs) counted 129 companies, compared with just 50 deals at the IPO market's trough in mid-2003.
After record commodity prices shifted attention to the energy industry during the first half of 2008, we saw an influx of new filings from both traditional and "green" energy companies. A correction in commodities has since tempered investor enthusiasm toward the sector, and we would expect to see fewer energy firms announcing IPO plans as oil prices drift lower. Nonetheless, the energy industry now represents 17% of potential deals in the queue and could increase its share amid rising withdrawals from high-risk biotech and technology stories. Persistent credit market turmoil has curbed filings from the financial sector, which accounted 15-20% of IPO activity over the last several years, but now represents only 13% of the pipeline and only 4% excluding REITS.
*Data excludes all SPACs.
The wave of energy filings introduced several large companies to the pipeline, including oilfield supply provider McJunkin Red Man ($4.3 billion in LTM sales) and coal producer Cloud Peak Energy ($1.6 billion), which is working against the trend of shrinking median revenue among IPO filers. The median revenue for companies filing since the end of June is $204 million, nearly three times the size of the median deal in 2007. This development has not been isolated to the energy sector, either, with hospital operator Select Medical Holdings ($2.1 billion), risk management provider Verisk Analytics ($819 million) and dark pool exchange Liquidnet Holdings ($376 million) all recently announcing plans for an IPO.
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| 2001 | 107 | 83 | 149 | 1.29 | $185.6 | |
| 2002 | 128 | 70 | 48 | 1.83 | $205.1 | |
| 2003 | 107 | 68 | 28 | 1.57 | $109.6 | |
| 2004 | 315 | 216 | 42 | 1.46 | $89.2 | |
| 2005 | 255 | 193 | 54 | 1.32 | $125.9 | |
| 2006 | 265 | 197 | 47 | 1.35 | $102.8 | |
| 2007 | 299 | 215 | 50 | 1.39 | $76.9 | |
| 1H 2008 | 67 | 26 | 48 | 2.58 | $65.6 | |
| July-August 2008 | 26 | 5 | 7 | 5.2 | $203.9 | |
Obviously, it would be premature to call a bottom in the current IPO cycle based on growing supply and filings from larger firms. Perhaps the unusually-high filing rate in the last two months (5.2 new filings to every deal priced) and growing presence of larger companies is more a reflection of continuing trouble in debt markets than a sign of an impending turnaround. Companies unable to secure new loans, and in some instances their private equity backers, could be looking to equity markets for liquidity. Either way, it is unlikely that filings will continue at their current pace unless pricing activity shows signs of life. We could be in store for a pipeline shakeout much like in 2001, when 149 deals were withdrawn, though many of these were smaller internet companies that missed the boom.
On the other hand, if market conditions were to improve, a heavy backlog creates the potential for a buyer's market in new offerings. Competition among firms and their investment bankers could result in bargain prices for investors, especially considering some of the stronger stories that have recently filed to go public. As always, we will be keeping track of new filing and withdrawal activity to see just how many companies are willing to line up at the closed IPO window.
Energy
Despite cooling commodity prices, energy companies have remained active and represent eight of the last 20 IPO filers. With heightened investor focus on renewable and eco-friendly power sources, "green" energy companies are a major driver of this trend, accounting for five of the last 18 filings and seven pipeline deals altogether. We believe investors will be keeping an eye on the following deals:
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| McJunkin Red Man | MRC | 8/20/08 | The largest North American distributor of pipe, valves and fittings to the energy industry. | $4286.6 | 11% | 4% |
| Cloud Peak Energy | CLD | 8/8/08 | A carve out of Rio Tinto's western US coal business and the country's second largest producer. | $1617.8 | 11% | 2% |
| US Power Generating | UPR | 8/12/08 | Operates electric power generation facilities in New York City and Boston | $1559.6 | 2% | -21% |
| Brand Energy | BEI | 7/17/08 | Provides maintenance and capital services to the downstream energy infrastructure market. | $1522.7 | 12% | 1% |
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| STR Holdings | PVS | 7/31/08 | Operates in two segments: solar module encapsulants and consumer products quality assurance services | $203.9 | 30% | 3% |
| GCL Silicon Technology | GCL | 7/18/08 | A supplier of polysilicon and wafers to companies operating in the solar industry. | $122.4 | 67% | 29% |
| A123 Systems | AONE | 8/8/08 | Provides rechargeable lithium-ion batteries and battery systems. | $42.3 | n/a | n/a |
| First Wind Holdings | WNDY | 7/31/08 | Develops, owns and operates a portfolio of wind energy projects | $12.0 | n/a | n/a |
| Noble Environmental | NEPI | 5/8/08 | A wind energy company operating 282 megawatts of electrical generating capacity | $0.0 | n/a | n/a |
Healthcare
This sector can churn out IPOs when times are good, but despite some intriguing early-stage stories we believe investors will mainly be looking at the following mature companies:
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| Select Medical Holdings | SLC | 7/25/08 | A leading operator of specialty hospitals and outpatient rehabilitation clinics. | $2073.1 | 14% | 1% |
| Prometheus Laboratories | RXDX | 12/19/07 | A specialty pharmaceutical and diagnostic testing services company focused on gastrointestinal disorders. | $241.7 | 27% | 7% |
| AGA Medical Holdings | AGAM | 6/20/08 | Provides medical devices for the minimally invasive treatment of heart defects and vascular diseases. | $157.2 | 29% | 2% |
| Bostwick Laboratories | BOST | 3/7/08 | A specialized laboratory focused on the diagnosis of cancer. | $102.8 | 13% | 2% |
| Epocrates | EPOC | 4/17/08 | Provides mobile device-based information services to healthcare professionals. | $65.6 | 13% | 39% |
Technology
Technology companies have not factored heavily in the latest filings (just 2 since July 1), and several in the backlog -- particularly those with small revenue bases or low levels of profitability -- risk getting stale if challenging conditions persist. Nevertheless, several companies are worth watching should the market turn. While the IPO market for tech IPOs could still take a while to come back, venture firms are currently sitting on a number of maturing technology investments that are likely to push forward when the market is ready to hear their stories.
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| DigitalGlobe | DGI | 4/14/08 | A leading provider of commercial high resolution earth imagery solutions. | $189.1 | 60% | 56% |
| Open Link Financial | LINK | 5/12/08 | Provides trading and risk management software for the energy, commodities and financial services markets. | $159.6 | 13% | 5% |
| NameMedia | NAME | 11/2/07 | A leading targeted online media business and an online marketplace for domain names. | $80.1 | 44% | -1% |
| SolarWinds | SWI | 3/21/08 | A leading provider of enterprise-class network management software. | $78.3 | 56% | 24% |
| Metastorm | MSTM | 5/13/08 | Leading provider of enterprise architecture modeling and business process software. | $64.9 | 2% | -6% |
| Nexsan | NXSN | 4/25/08 | A leading provider of disk-based storage systems designed for long-term digital information storage. | $55.7 | 8% | -7% |
Others to watch
From dark pool trading to risk management, here are some interesting (and highly profitable) companies that could generate some buzz.
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| Education Management | EDMC | 12/21/07 | A campus-based and online post-secondary education services provider. | $1615.5 | 19% | 6% |
| Verisk Analytics | VRSK | 8/12/08 | Provides risk management solutions based on proprietary data and statistical models. | $819.0 | 43% | 19% |
| Liquidnet Holdings | LNH | 7/2/08 | An electonic marketplace for institutional investors to anonymously trade equities. | $376.2 | 59% | 31% |
| Grand Canyon Education | LOPE | 5/13/08 | Online post-secondary education services provider offering graduate and undergraduate programs. | $125.9 | 13% | 3% |
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