The IPO Market Heats Up.

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Author: DeCarlo, ScottReifman, ShlomoStone, Andy

Some of the old fervor is back in the market for newly public companies. January saw 11 offerings, according to Renaissance Capital in Greenwich, Conn., and they raised $1.8 billion. Compare January 2000, near the peak of the bubble, with $3.1 billion hauled in on 17 issues. Thomson Financial reports that three of this year's new issues, or 27%, were priced above the range first listed in their offering prospectuses; 31% exceeded their initial targets in all of 2000.

Another sign that the new-issues market is heating up: January 2006 offerings had an average first-day gain of 16% versus the 7% average since 2001. Richard Peterson, an analyst at Thomson, forecasts that 300 companies will go public this year.

Since the start of 2005 virgin companies have accounted for 59% of the new-issue business, retreads of leveraged buyouts the remainder. "Investors are willing to open up to these reverse deals, even though they are highly leveraged, because there is an emphasis on steady cash flows, making them appear more stable," says Renaissance's Paul Bard. The busiest year for leveraged buyouts of public companies by number was 1988, with 80 going private. How would investors have fared buying the LBOs of 1988 that returned to the public arena? We found 14 examples, and someone who bought the lot at first-day closing prices would have enjoyed an average relative-to-market score of 135 (where 100 means tracking the market).

There have been periods when you could have made nice money buying new issues, but the last decade has not been one of them. We count 2,998 new issues in the last ten years (excluding penny-stock deals), with an average relative-to-market score of only 94. Even this meager number is propped up by a handful of big winners, such as Genentech, which went up 441%, and Wynn Resorts, up 396%. (Genentech originally went public in 1980; it was acquired and returned as a separate stock in 1999.) The median new issue from the decade has a relative-to-market score of just 50.

Beaming Up. Wide-ranging travelers Captain Kirk and Mr. Spock are ideal shills for Priceline.com, which went public in March 1999 at $96 (adjusted for a 1-for-6 reverse split), touting a "name your own price" model that offered travelers big discounts in return for little control over travel times. But airline pricing has become so competitive that Priceline is no longer worth the hassle for many. The stock spiked to $990 in April 1999 only to crash to $6 in October 2002. It has recovered to $22.

While U.S. customers still have the option to bid for travel services, Priceline also began offering a more traditional booking service online. Over the past 12 months the company earned $35 million pretax, on revenue of $950 million. Priceline.com now sells for an unbubble-like 15 times its 2006 consensus earnings forecast.

BUSINESS online travel services

IPO OFFER DATE 3/30/99

OFFER VALUE $160 mil

PRICE CHANGE FROM FIRST-DAY CLOSE -95%

ALLTIME HIGH/LOW $990 (4/30/99) / $6 (10/10/02)

Outsourcing Security. DynCorp, which went private in 1987, plans to become a public company again. Its 14,000 people (in 35 countries) pull in $1.9 billion in sales, providing civilian and military government agencies with specialized technical services, such as aviation services and law enforcement training and support. DynCorp became a wholly owned subsidiary of Computer Sciences in 2003, which then sold it in 2005 to Veritas Capital Management. Since fiscal 2003 DynCorp's revenues and operating income (earnings before interest, taxes, depreciation and amortization) have increased at annual rates of 28% and 50%, respectively. Backlog as of September 2005: $3 billion. DynCorp brags that since 2003 it has won 81% of new or renewed contracts on which it bid. Leverage remains high: The ratio of debt to total capital, currently at 74%, is projected to fall to 63% following the offering.

REVENUES $1.9 bil

BUSINESS government technical services

IPO FILE DATE Sept. 28, 2005

PROPOSED OFFER VALUE $450 mil

PROPOSED TICKER DCP

LEAD UNDERWRITERS Credit Suisse First Boston, Goldman Sachs

Early Stages. Alexza Pharmaceuticals is developing promising drugs, but as with any pharma upstart there is a risk that the drugs--in this case, treatments for acute migraine headaches, panic attacks, agitation and pain--won't pass clinical trials. Other than $6 million, mostly from government grants, the company has generated little revenue since its formation in 2000, while its accumulated losses total $77 million. Alexza has three compounds in early clinical trials, with a fourth scheduled to begin soon, and is also developing a new technology to deliver drugs. Before its public equity offering Alexza had $38 million in cash, which will help it stay afloat while it seeks Food & Drug Administration approval. Francis Gaskins, president of IPO Desktop, cautions that unlike many successful startups in this field, Alexza has yet to tie up with a big pharmaceutical company.

REVENUES $6 mil (total since inception in 2000)

BUSINESS treatments for migraines

IPO FILE DATE Dec. 22, 2005

PROPOSED OFFER VALUE $86 mil

PROPOSED TICKER ALXA

LEAD UNDERWRITER Piper Jaffray

                                             PERFORMANCE
                                         FROM FIRST-DAY CLOSE
                                         --------------------
OFFER                                                REL TO
YEAR    COMPANY/BUSINESS                 ACTUAL     S&P 500[1]
--------------------------------------------------------------
1999    Hudson City Bancorp/banking      543.6%        701
1999    Genentech/biotech                441.2         582
2001    Peabody Energy/coal              440.8         553
1999    Consol Energy/coal, gas          411.6         534
2002    Wynn Resorts/casinos, gaming     396.4         348

2000    Broadwing/telecom equip          -99.0%          1
2000    Avici Systems/networking equip   -98.9           1
1997    American Skiing/ski resorts      -98.6           1
1999    Delphi/auto parts                -98.3           2
2005    Refco/brokerage services         -98.0           2

Performance figures through Jan. 31. Performance value accounts for spinoffs and splits. This table covers initial public offering of common equities from Jan. 31, 1996 through Jan. 31, 2006, with offer values of at least $200 million. 1 The ending value of $100 invested in the stock, divided by the ending value of $1 invested in the S&P 500. Sources: IPO Database and FT Interactive Data via FactSet Research Systems.

Legend for chart:
A - INDUSTRY
B - NUMBER OF NEW ISSUES
C - % OF TOTAL DEALS
D - OFFER VALUE ($MIL)
E - PERFORMANCE FROM FIRST-DAY CLOSE ACTUAL
F - PERFORMANCE FROM FIRST-DAY CLOSE REL TO S&P 500[1]

                A                   B    C       D     E     F

DRUGS & BIOTECHNOLOGY              16   11%    $860    7%   100
HEALTH CARE EQUIPMENT & SERVICES   15   11    1,140    8    106
BUSINESS SERVICES & SUPPLIES       11    8    2,331   42    137
RETAILING                           9    6      904   -4     93
SOFTWARE & SERVICES                 9    6    1,244   12    105

Latest 12-month performance figures are through Jan. 31 and are based on the median company. 1 The ending value of $100 invested in the stock, divided by the ending value of $1 invested in the S&P 500. Sources: FT/Interactive Data and Reuters Fundamentals via FactSet Research Systems; Forbes.

Only 2 of 15 recent Morgan Stanley new issues trade below their first day close. Big winners: Somaxon Pharmaceuticals, up 77%, and WebMD Health, up 64%.

                                                   PERFORMANCE
                                               FROM FIRST-DAY CLOSE
                             NUMBER    OFFER   --------------------
                             OF NEW    VALUE               REL TO
LEAD UNDERWRITER             ISSUES   ($MIL)   ACTUAL    S&P 500[1]
-------------------------------------------------------------------
MORGAN STANLEY                 15     $5,400     18%        113
GOLDMAN SACHS                  13      3,631     17         111
CITIGROUP                      11      3,032      2          98
CREDIT SUISSE FIRST BOSTON      9      1,879     25         122
MERRILL LYNCH                  10      1,740     -9          87

Latest 12-month performance figures are through Jan. 31 and are based on the median company. 1 The ending value of $100 invested in the stock, divided by the ending value of $1 invested in the S&P 500. Sources: FT Interactive Data and Reuters Fundamentals via FactSet Research Systems; Forbes.

Legend for chart:
A - COMPANY/BUSINESS
B - OFFER DATE
C - OFFER VALUE ($MIL)
D - PERFORMANCE FROM FIRST-DAY CLOSE ACTUAL
E - PERFORMANCE FROM FIRST-DAY CLOSE REL TO S&P 500[1]
F - LEAD UNDERWRITER

   A
   B          C      D      E                F

CITI TRENDS/urban apparel stores
5/18/05     $54    193%    271    CIBC World Markets

FREIGHTCAR AMERICA/railroad equipment
 4/6/05     162    173     253    UBS

RACKABLE SYSTEMS/computer hardware
6/10/05      75    146     231    Thomas Weisel Partners

VERIFONE HOLDINGS/electronic payment services
4/29/05     154    137     215    JPMorgan Chase

AMERICAN COMMERCIAL LINES/marine transport svcs
10/7/05     173    101     188    Merrill Lynch


REFCO/brokerage services
8/11/05    $583    -98%      2    Credit Suisse First Boston

ODIMO/online jewelry retailer
2/15/05      28    -84      16    CIBC World Markets

AVALON PHARMACEUTICALS/biotech
9/29/05      29    -59      39    WR Hambrecht

CRYOCOR/cardiac treatment systems
7/14/05      41    -53      45    WR Hambrecht

FUSION TELECOM INTERNATIONAL/Internet services
2/15/05      23    -44      53    Kirlin Securities

The tables on this page cover initial public offerings of common equities over the latest 12 months (2/1/05 to 1/31/06), offering prices of $5 or more and offering values of $5 million or more. They exclude ADRs (American Depositary Receipts), closed-end funds, limited partnerships, real estate investment trusts and units. Performance figures are through Jan. 31. 1 The ending value of $100 invested in the stock, divided by the ending value of $1 invested in the S&P 500. Sources: FT Interactive Data, IPO Database and Reuters Fundamentals via FactSet Research Systems; IPO Desktop; Hoover's; initial offering prospectuses; Renaissance Capital's (Greenwich, Conn.) IPOhome.com; Thomson Financial; Forbes.

GRAPH: Go Private, Go Public: Investment banks get companies going and coming on Wall Street. This chart of deal volume shows, in blue, a wave of leveraged buyouts, and then, in gray, a succeeding wave of public offerings. The latter statistics, toting the annual capital raised from new issues with offer prices of $5 or more and gross proceeds of at least $5 million, include both leveraged buyouts being unwound (like Fort Howard and American Standard) and companies making a first trip to the public equity markets (like Google and United Parcel Service). Leveraged buyout figures are for privatizations of publicly traded companies. Annual capital raised for new issues excludes ADRs (American Depositary Receipts), closed-end funds, limited partnerships, real estate investment trusts and units. Source: Thomson Financial.

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By Scott DeCarlo; Shlomo Reifman and Andy Stone