'PwC US IPO Watch Q1 2012: A buoyant first quarter produces strong IPO returns, says PwC

Technology, industrial and financial services sectors lead new offerings

Market volatility declines, new issuers show strong post-pricing gains

 

NEW YORK – April 2, 2012 – Building on momentum carried over from the fourth quarter of 2011, the US IPO market showed significant strength in the first quarter of 2012, resulting in the highest first quarter volume since 2007. New issuers saw strong aftermarket investor interest in their IPO stocks, creating positive returns for 80 percent of current quarter IPOs. Three of the five highest day one IPO returns since January 2011, occurred in March 2012, which helped the IPO market produce day one returns in the quarter of 16 percent. Average post-IPO returns for offerings that priced from January 1, 2011 to March 31, 2012, entered into positive territory, ending the first quarter up an average of 13 percent from IPO price, reversing losses at the end of 2011. This positive reception by the investor marketplace demonstrates improved optimism about new issuers with sound fundamentals and a solid growth plan, according to IPO Watch, a quarterly and annual survey of IPOs listed on U.S. stock exchanges by PwC’s Transaction Services practice.

In the first quarter of 2012, a total of 44 IPOs raised $5.8 billion in proceeds, representing an increase of 33 percent compared to 33 pricings in the first quarter of 2011. Total proceeds were lower than the $13.0 billion raised in the first quarter of 2011, where proceeds were largely driven by five offerings which raised in excess of $1 billion each. The average IPO size in the first quarter of 2012 decreased 67 percent to $131 million, from $395 million in the first quarter of 2011, largely due to the lack of billion-dollar deals pricing in the current quarter.

The overall markets returned to a period of decreased volatility in the first quarter - lower volatility can lead to increased investor confidence about the stability of the relative valuations assigned to new issuers, and helps promote an environment of increased IPO investment. Overall market volatility, as measured by the VIX, has declined 40 percent from the high levels experienced in the second half of 2011, and reached lows in March 2012 not seen since June 2007.

The first quarter saw continued interest from new issuers in the IPO process with 48 companies entering the IPO registration process, which was only a 20 percent reduction in the number of new filers compared with the very strong first quarter of 2011. New filers are seeking to raise more than double the average proceeds generated by IPOs in the current quarter, i.e. an average of $274 million per filing. The total capital being sought by new filings in the first quarter totaled $13.2 billion, with larger offerings from Facebook and Empire State Realty Trust seeking to raise in excess of $6 billion combined.

The current IPO pipeline, ie. companies that have filed for an IPO in the last twelve months ("LTM"), but not yet priced, remains high at 157 companies, representing a slight decline of 8 percent from year end 2011. This $33 billion pipeline represents the equivalent of 94 percent of 2011 total IPO's, and continues to highlight the need for new issuers to differentiate their offerings relative to their competition for IPO investment.  The LTM IPO pipeline is led by three industries contributing 60 percent of total pipeline volume, which includes the technology (24 percent), industrial (18 percent) and financial services (18 percent) sectors.

“Continuing on the increase in IPO activity in the fourth quarter, we saw strong first quarter IPO volume and filing activity, which coupled with the increased investor interest in IPOs, bodes well for the year ahead,” said Henri Leveque, leader of PwC’s U.S. Capital Markets and Accounting Advisory Services.  “The IPO pipeline remains healthy with a diverse range of companies exploring public launches, with notable strength in the technology, industrial and financial services sectors.  Major IPO activity from some of the larger well-known technology players, including Facebook, will likely lend support to a host of smaller technology companies looking to enter the public markets.”

The U.S. IPO market continues to attract a diverse range of companies across different industries, according to PwC.  The technology, industrial and financial services sectors were the most active during the first quarter, contributing thirteen, nine and nine IPOs, respectively.  In terms of value, industrial companies led with $2.1 billion, representing 36 percent of total capital raised in the first quarter of 2012.

 

Thirty-six of the 44 IPOs in the first quarter of 2012 were backed by financial sponsors (i.e. a private equity or venture capital firm), which accounted for $4.8 billion of total quarterly proceeds.  Financial sponsor-backed companies represented 82 percent of the total volume and 83 percent of the total value of IPO activity in the first quarter.  This is in line with the first quarter of 2011 when financial sponsor-backed IPOs represented 70 percent of the total volume and 86 percent of the total value.

“Financial sponsors continue to play a major role in IPO market activity, as they seek to fully monetize key portfolio investments in an improving climate for the capital markets, particularly in the technology sector where all the technology IPOs in this quarter were backed by financial sponsors,” added Leveque.  “As the year unfolds, we expect the IPO pipeline to continue to reflect a high proportion of financial sponsored companies as private equity and venture capital firms seek to raise capital, build liquidity and pursue new acquisition opportunities globally.” 

Continuing the recent trend witnessed in the second half of 2011, the volume of foreign issuers coming to the U.S. IPO markets declined during the first quarter of 2012.  There were eight foreign offerings compared to ten in the same period in 2011.  The contributors to non-U.S. proceeds in the first quarter are domiciled in the Cayman Islands, Bermuda, British Virgin Islands, Israel, The Netherlands and Peru.

 

Despite seventy-five percent of IPOs in the current quarter pricing within or below their anticipated initial pricing range in their first filing, new issuers successfully attracted very strong after-market investment interest, and produced day one returns of approximately 16 percent, and a one-week return of 13 percent. The first quarter new issuer IPO market as a whole produced returns of approximately 29 percent, significantly outperforming a very strong S&P500 return for the quarter of 12 percent.

“The quarter ended on a high note with well received pricings in the last week of March, cap ping off a successful February and March after a slow start in January. The current low volatility environment is supportive of continued growth in interest in IPO's in the upcoming quarters," noted Neil Dhar, leader of PwC's US Capital Markets Services.  “However, looking ahead we expect the window of opportunity for companies in the IPO process to fluctuate due to the cautious outlook for the global economy. Those companies that are thoroughly prepared for their opportunity to access the markets and for the game changing transformation of being a public company will have the competitive long-term advantage.”

Special Focus: A Look at the JOBS Act

The US Congress has passed the Jumpstart Our Business Startups (JOBS) Act, and the bill currently awaits President Obama's signature.  A principal goal of the JOBS Act is to create a so-called "IPO on-ramp" for emerging growth companies, i.e., private companies with less than $1 billion in revenue in their prior fiscal year.  The bill is aimed at encouraging these companies to raise capital through an initial public offering of their common equity.

A company would no longer be an emerging growth company five years after completing its equity IPO.  Additionally, a company would no longer be an emerging growth company if it:

  • Has more than one billion dollars in gross revenue,
  • Issues more than one billion in non-convertible debt in a three-year period, or,
  • Becomes a "large accelerated filer" (generally, public float of $700 million or more)

A company cannot be an emerging growth company if it first sold common equity in a registered offering on or before December 8, 2011.

Under the JOBS Act, amongst numerous provisions, emerging growth companies would be permitted to:

  • Submit an equity IPO registration statement for SEC staff review on a confidential basis;
  • Prepare an equity IPO registration statement with two years of audited financial statements in lieu of the usual three year requirement;
  • Omit selected financial data for any periods preceding the earliest audited financial statements included in its initial registration statement;
  • Adopt any new or revised accounting standards using the same timeframe as private companies if the standard applies to private companies;
  • Comply with the SEC's executive compensation disclosure requirements on the same basis as a "smaller reporting company" (generally public float less than $75 million). 

Emerging growth companies would also be temporarily exempted for up to five years from:

  • The internal control audit requirements of Section 404 of the Sarbanes-Oxley Act (the temporary exemption would not apply to the internal control management reporting requirements of the Sarbanes-Oxley Act); and
  • Many current and future executive compensation-related disclosures. 

The JOBS Act will also implement a number of changes relating to research reports and other communications relating to emerging growth companies. 

PwC US IPO Watch is a quarterly and annual survey of IPOs listed on U.S. stock exchanges.  These include IPOs by domestic and foreign companies, best-efforts, business development companies, filings with the FDIC, and bank demutualizations.  IPOs do not include unit investment trusts, commodity trusts and fully classified closed-end funds.  Visit our website, www.pwc.com/us/ipo, for the annual 2011 US IPO Watch and information about PwC's IPO Services

PwC’s Transaction Services professionals help companies make informed and empowered investment, divestment, capital market and reorganization decisions. We assist clients with due diligence, M&A strategy, integration, valuation, accounting, financial reporting, and capital raising on both the buy and sell side of a deal.  Our deal professionals help clients understand the risks in transactions, so they can be confident they are making informed strategic decisions. From their deal negotiations, to capturing synergies during integration, we help clients gain value; and ultimately, deliver this value to stakeholders. For companies in distressed situations, we advise on crisis avoidance, financial and operational restructuring and bankruptcy. With approximately 1,200 deal professionals in 16 cities in the U.S. and over 9,500 deal professionals in over 90 countries, experienced teams are deployed with deep industry and local market knowledge, and technical experience tailored to each client's situation.  Our field-proven, globally consistent, controlled deal process helps clients minimize their risks, progress with the right deals, and capture value both at the deal table and after the deal closes. 

For more information about M&A and related PwC services, please visit: www.pwc.com/ustransactionservices 

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Maggie Nolan / Katie Prue
Brainerd Communicators, Inc.
Tel: +1 (212) 986-6667
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