Associated Press
08.23.2004

The IPO market now enters the post-Google era. And the outlook isn't pretty.

The attention and fanfare over Google Inc.'s $1.7 billion initial public offering hid a sobering reality for Wall Street underwriters as they enter the traditional late-summer hiatus for stock issuance: Most companies are unable to complete their IPOs. The ones that do, including Google, have to do so at a reduced price. What's more, many of the companies to come to market have performed poorly.

It all adds up to a difficult environment in which to sell stock. "We're struggling," said Richard Peterson, chief market strategist for Thomson Financial in New York. "There are more losers than winners right now."

On the surface, the IPO market seems to have had a good year so far. To date, there have been 148 IPOs, raising $29.1 billion, according to data from Thomson Financial. By contrast, there were just 86 IPOs in all of last year, raising $16.1 billion, according to Thomson.

And more companies are filing to go public. There have been 277 potential IPOs filed with the Securities and Exchange Commission this year, the most since 674 filed in 2000.

But, there have also been more companies deciding to sit out this market. So far this year, 45 companies have either postponed or withdrawn their IPOs, more than the 42 to do so in all of last year - and 2003 was considered the weakest year for IPOs since the 1970s.

Part of the hesitancy among issuers to pursue an IPO stems from the price cuts companies are forced to make to get their deals done. So far this year, 58, or 39 percent, of the 148 deals to come to market priced their offerings below original expectations, according to Thomson. By contrast, despite last year's tough market, just 16, or 15 percent, priced below views.

There's a good reason investors want low prices: IPOs haven't really given them much in the way of gains this year. The average IPO is down 1.2 percent from its offering price this year, compared with a 26 percent average gain in 2003. Of the 148 companies to go public this year, 76, or 51 percent, now trade below their offering prices, according to Thomson Financial.

The current backlog of deals doesn't contain any high-profile companies. Most are small, and there are only a handful of companies that have stirred any early enthusiasm among investors. Among them is Educate Inc., operator of the Sylvan Learning Centers tutoring schools, which is trying to raise $225 million through Goldman Sachs Group Inc. and Merrill Lynch & Co. Educate, based in Baltimore, had wanted to go public in August, but likely will now come in September.

Investors likely won't lose money because of IPOs over the next several weeks, but that is only because there won't be any new companies coming to market. There are no large-scale IPOs on the schedule because of the late-summer break that occurs at the end of every August. Wall Street underwriters don't even begin to market offerings until the week after Labor Day, so IPOs typically don't resume until the middle of September.

Such a long break might work to the IPO market's advantage, said John Fitzgibbon Jr., an independent IPO analyst based in Jersey City, N.J.

The broader markets' performance has been the biggest impediment to better performance for IPOs, particularly the weak showing for the Nasdaq Composite Index, which is off about 9 percent for the year so far. If the broader markets improve, however, so may the environment for IPOs, Fitzgibbon said.

"A lot can happen in the next four to six weeks," he said. "If the markets turn around, we could still find ourselves with a pretty good fall."

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