There has been a lot of press lately about the dearth of IPOs in 2016. That got me curious and I decided to run some numbers to see what’s going on. So I’ll do a couple of posts to see who is going public and how it’s working out for them.
Before I get into numbers I’d like to lay out my methodology which is a bit unconventional for IPO analysis.
- I did a FinViz screen of U.S. companies with current market cap of over $2bn that IPOed since 2010. That excludes a lot of formerly hot IPOs that sizzled out to settle below that size threshold.
- I broke the list of 246 such IPOs into my own subjective themes and deal types.
- Performance numbers are calculated not from where the IPO priced but rather from the closing market price on the first day of trading. I did that to be “democratic” – few people can get access to hot IPOs at the offering price but anyone can buy it on the open market at the end of that day.
- Relative returns numbers assume that investors had two choices on the day of each IPO – buy the newly public stock or put that money into S&P 500 index fund. I think it’s important to normalize for the timing of different deals when comparing them to each other.
Ok, Exhibit 1 shows the number of companies by Industry/Theme that have gone public with the top two areas each year highlighted in green. Overall the deal activity peaked in 2014, pulled back in 2015 and is non-existent so far this year. Some other observations:
- Underwriters catered to investors’ desire for income with REITs and MLPs
- Software, Internet and tech in general are typically fertile grounds for going public
- Oil & Gas was hot until the oil price crashed in mid-2014
- Media had a lot of activity but most of it is restructuring deals and spin-offs
- Biotech activity is underestimated here as there were tons of deals in 2013-2015 timeframe, but many fizzled out to under $2bn since
- There was a decent amount of activity in various corners of the financial sector
- Autos in 2010 was a fluke with GM and Visteon emerging from bankruptcy and a one-off TSLA deal
Ok, let’s now zoom in and take a look at the largest 30 newly public companies in Exhibit 2 (current market size, not the capital raised in IPO). To see what sorts of IPOs are happening I broke it down by deal type:
- To me a Real IPO is something like Facebook – started in a college dorm (or a garage), few rounds of venture capital funding then going public within a few years of being founded. That actually raises capital for the founders, VC backers and company operations. Capitalism at its best!
- Merger-related deals are technically initial public offerings, but it’s really two companies combining operations (e.g. Kraft and Heinz) and listing the entity under a new ticker symbol. Cute financial engineering but not much capital is being created there.
- Spin-offs are the opposite of merger deals: for example Abbot separates its AbbVie division or eBay spins off its payment operation under PayPal. Corporate finance magic again…
- Bankruptcy exit is a fun one. You get in trouble, wipe out current shareholders, restructure operations (screwing retirees & suppliers in the process), then go public again and raise more equity capital from new shareholders. Cool, ha?!
- Private Equity (PE) Exit is the coolest. Let’s see, you buy the equity from public shareholders for $100, then you load the company up with debt (paying yourself most of the $100 back), fire bunch of people, close some factories/offices, find more “operational efficiencies”, in about 3 years you take her public again pocketing maybe another $100 in equity capital. What a country!
So out of the top 30 deals, only 7 were “Real IPOs” (Exhibit 3). Relative returns are all over the map, but actual IPOs do seem to work pretty well (Twitter being the big exception). Again, the real dogs would have fallen out of the $2bn range.
Anyways, no big actionable insights here, just a primer on IPO types and a look at the slowing activity. Venture-backed companies keep raising private capital and staying away from public markets longer than ever. So we might see IPO tables continue to be dominated by PE Exits and Spin-offs. And I’ll continue to index most of my stock exposure buying Facebooks and Teslas along with GMs and Twitters!