IPO Observers See Market Rebound
Survey of IPO attorneys finds optimism about the new-issues mart despite challenging conditions
By Kelly Holman August 4, 2008
The market for initial public offerings isn't particularly robust at the moment, but that doesn't mean that attorneys who handle IPOs aren't optimistic about the prospects for the coming year.
That was the finding of the 2008 IPO legal advisor survey conducted by Gavin Anderson & Co. The survey of 57 top IPO attorneys, which collectively advised on more than $17.4 billion of IPO transactions last year, marked the second annual IPO survey by the New York public relations firm.
It discovered that 93% of the responding attorneys expect new equity issuances will range from "much stronger" to "slightly stronger" in 2009. As for the state of today's IPO market, respondents cited a lack of liquidity, "investor fear," low valuations, the credit crunch and general economic volatility as factors that were hampering the new issues market. Moreover, 73% said the new issues market was much weaker in the first half of 2008 than the prior year.
Geographically, China was viewed by 44% of respondents to be the leading source of new equity issuances in the US equity market in the coming months followed by India, both of which are also attracting strong private equity interest.
"We are still seeing Chinese companies looking to register initial public offerings, along with companies in India and Brazil talking about doing IPOs in the US," said Michael Kaplan, a partner at Davis Polk & Wardwell. "The SEC is making moves to be more flexible to foreign issuers."
At the same time, Kaplan notes that under the Securities and Exchange Commission's new requirements, companies must address executive compensation in a detailed fashion in order to provide greater transparency.
The SEC's decision to allow foreign issuers to use International Financial Reporting Standards (IFRS) rather than US GAAP reporting standards was cited as one reason the US market had become more attractive to foreign issuers. Forty-one IPO lawyers said a shift to IFRS has been a positive development influencing the attitude of cross-border issuers toward the idea of US listings.
A solid number of surveyed attorneys, or roughly 40%, said they expect further changes in Sarbanes-Oxley and other regulations would further ease the reporting standards on foreign issuers.
Jonathan Kravetz, an attorney at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, said in the survey that "there is likely to be a continuing, if gradual, evolution toward the harmonization of financial reporting standards," as the SEC seeks to secure the preeminence of the US capital markets.
Despite the difficulties in the IPO market there isn't likely to be a rush by US companies to list overseas because of regulatory burdens, according to Kaplan. "The problem is it's very hard for a US-domiciled company to be a public company anywhere in the world as you will likely have to register with the SEC," he says.
Only 18 attorneys thought US companies would look towards going public on foreign exchanges.
Not surprisingly, alternative energy and clean technology were among the hotter industry segments for initial stock offerings, making up 28% of the total responses whereas biotechnology and healthcare drew 22%, followed by technology at 20% and traditional energy companies with 19%.
White & Case partner Colin Diamond says that the actual pricings and deals coming to market have declined dramatically since last year, but that filings are holding up better than pricings. IDD reported the difficulties venture capital firms faced in the market last month.
Yet the number of IPO registrations in the pipeline, Kaplan says, including those backed by financial sponsors, are helping to fuel the positive outlook among survey respondents that work on public offerings. "We are seeing some private equity-backed registrations with firms looking to monetize investments and the M&A market continuing to be fairly weak," he explains.
Another strong entrant in the new issues market over the past year, special purpose acquisition companies (SPACs), was expected to generate a strong presence in coming months when Gavin Anderson interviewed attorneys by telephone from May to June. At that time, close to half of the surveyed attorneys thought the blank check companies would remain a significant source of new issuance, but Kaplan says if the same group were polled today the response would likely be very different since the number of SPACs coming to market is about as dormant as the market itself.
Interestingly, this year only 43% of respondents thought assembling financial statements for an IPO prospectus was the major chief challenge involved in an IPO registration compared with 74% of attorneys last year.
The SEC's new compensation discussion and analysis requirements emerged for the first time as a significantly challenging section of a company's Form S-1 filing, cited by a fifth of the respondents in this year's survey. At the same time, the percentage of respondents citing the preparation of financial statements as the chief S-1 challenge fell to 43% this year from 74% in 2007.
The outlook for IPOs in the fourth quarter is still cloudy, however.
"What we're hearing from bankers is the second half of September at the earliest for a recovery; given volatile markets it could end up being later than that," Kaplan says.
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