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The IPO market bounced back this year, enabling a backlog of promising companies, including several on this year's Inc. 5000, to go public.
Shades of 2007: After two quiet years for IPOs, companies such as RealD, which makes 3-D technology, are testing the public markets.
After months of silence, the market for initial public offerings of stock rebounded in 2010. The number of companies raising money through an IPO reached a post-financial crisis high of 64 during the first half of 2010, with some $9.2 billion raised, surpassing the full-year total of 63 deals for 2009 with $22.8 billion in total proceeds. Technology IPOs were the most popular, representing 15 of the deals, followed by 15 financial IPOs, 12 in energy, and 10 in health care.
Keeping pace with the trend, 29 Inc. 5000 companies went public this year, and 53 more of them have filed the paperwork to go public. (To qualify for the Inc. 5000, companies must have been privately-held through 2009.)
RealD's (No. 347) $200 million offering was one of the year's more notable deals. Based in Beverly Hills, the company licenses 3D technology used by the majority of U.S. movie theater chains. The company has benefited from rising 3-D movie ticket sales, which accounted for 11 percent of the total domestic box office in 2009, up from just 2 percent in 2008. Company revenue increased to $189 million; up 325 percent between 2009 and the 2010 fiscal year ending in March. "It is a fast-growing company with a good story, but it is not profitable," says Bill Buhr, an IPO strategist with the Chicago research firm Morningstar. "The concern is whether RealD can continue to be innovative and keep a competitive advantage if heavy players like Sony come out with the same or better technology."
RealD's IPO consisted of 12.5 million shares priced at $16, a share price that eclipsed the $13 to $15 target. On the first day of trading in July, shares of RealD jumped by 21 percent.
At $339 million, one of the biggest deals to date was for CBOE Holdings (No. 3,041), the company that controls the Chicago Board Options Exchange. The company went public on NASDAQ in June, pricing 11.7 million shares at $29 and realizing a gain of 12 percent the first day of trading.But the success enjoyed by companies like CBOE and RealD was by no means typical. In the first quarter of 2010, 44 percent of IPOs were priced below their initial target, while 51 percent were priced below range the second quarter, reports Renaissance Capital. "Even though IPO activity increased, investors are still being selective and price sensitive," says Nick Einhorn, an analyst at Renaissance Capital, an IPO research firm in Greenwich, Connecticut.
Some companies have debuted strongly, but struggled in the days that followed. MaxLinear's (No. 17), a maker of broadband communications chips, went public in March. The Carlsbad, California, company raised $90 million and closed up 34 percent on the first day of trading. Petaluma, California-based Calix Networks (No. 4,638), a supplier of broadband access equipment to service providers, raised $82 million and watching its shares rise more than 16 percent. But the returns for these tech stocks have been less than stellar since going public. MaxLinear is down 30 percent from it opening price, while Calix is down 23 percent.
Other companies faltered right from the start. TeleNav (No. 526) joined the pool of problem IPOs in May. The mobile phone navigation services provider raised $56 million, selling 7 million shares at $8 apiece, well below the expected range of $11 to $13 per share. The tech company's share price has fallen 37 percent since its debut. Similarly, Higher One Holdings (No. 811), a provider of online payment solutions to universities and colleges, raised $108 million, pricing 9 million shares for $12 apiece, after originally hoping to sell 14.3 million shares for $15 to $17. One of this year's sleepers was RealPage (No. 1,917), a property management software developer in Carrollton, Texas. The company went public on the Nasdaq in August, raising $135 million by offering 12.3 million shares at $11, below the initial 13.5 million shares in the $13 to $15 proposed range. But on the first day of trading, RealPage staged a comeback, racking up impressive gains of 32 percent. Today, it is trading at roughly 55 percent above its IPO price. Business is thriving. RealPage grew to $140 million in 2009 revenues, up from $112 million in 2008.
Volume was much healthier this year but the overall performance of IPO deals has been poor. Returns across all sectors the first half of 2010 were down 3.6 percent, according to Renaissance Capital.
Among the worst performing offerings during the first half of 2010 were Codexis (No. 519) and Global Geophysical Services (No. 1,095). Codexis was one of a handful of U.S.-based clean-energy companies to go public. Based in Redwood City, California, the biotech company sells catalysts for biofuel production. It debuted in April, with 6 million shares sold for $13, raising $78 million versus an initial price range of $13 to $15 a share. Codexis has not risen above its offering price, trading 40 percent below its IPO price.
Missouri City, Texas-based GGS provides 3D seismic data to oil and gas exploration companies. Its $90 million IPO deal was priced down, selling 7.5 million shares at $12 after planning to sell 11.5 million shares for between $15 and $17. Shares of GGS have fallen 47 percent since the IPO. The coming months present compelling opportunities. Several mega deals are on tap, including the hospital operator HCA (No. 4,512) with $30 billion in revenue, retailer Toys "R" Us (No. 4,932) with $13 billion in sales, and government consulting firm Booz Allen Hamilton (No. 3,247) with $5 billion in contract revenue. HCA, which operates hospitals and surgery centers, has already filed for a $4.6 billion IPO, which would be the largest-ever private equity-backed debut.Another promising hopeful is Zipcar (No. 919). The Cambridge, Massachusetts-based company offers a car sharing service that allows clients to rent by the hour. Revenues climbed 24 percent in 2009 to $131 million. "The best IPOs have been fast-growing companies with a unique business model, and Zipcar fits that profile," says Einhorn. The Netflix of video game rentals, GameFly (No. 1,650), is set to go public, too. The Los Angeles–based online service has been profitable the past two years. Revenues grew 18 percent to $63.2 million in 2009.
With the high volume of IPO filings representing north of $35 billion, 2010 could rank among the top years of the past decade in terms of proceeds raised. Of course, the IPO market's recovery is very much a work in progress and could be reversed if the stock market were to falter in the fall. Still, as Einhorn notes, private-equity firms are hopeful that the IPO window will remain open long enough for them to exit some of the companies they invested in years ago. "We are still not at the same levels as 2004 or 2007," he says. "But the last 12 months has shown a big improvement."
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