Saturday, October 14, 2006

An excellent question

Paul Gutches gets a research point for calling me out on some numbers I didn't put in yesterdays post on pulled IPOs. He writes:

" ...Seems to me the decision to pull an IPO is made based on all the usual leading indicators we look to for orientation. So isn't the conclusion of poor market conditions a subjective statistic based solely on the perceptions companies are making of the leading indicators? That to me puts us back at square one.

I question how interesting the pulled IPO data is in isolation. Adverse market conditions could mean unsettled industry standards in the specific market they are trying to enter, or fierce competition, etc. I am thinking that the percentage of IPO's that have been canceled out of the total # of planned IPO's would be more intriguing. If 51 companies out of 200 (I have no idea how many have applied to go public) have pulled out in 2006 as opposed to 51 out of 75 in 2000... that would say something more interesting to me..."
An excellent observation Paul. The IPO post was a little tongue in cheek so allow me to add more detail.

First the numbers you requested: in the year-to-date period last year there were 171 IPOs versus 145 this year, a 15% decline in number of IPOs. In the same period last year 45 companies yanked their IPOs versus 51 this year. Last year 45/171 would be 26% cancelling scheduled IPOs while this year works out to a 35% cancellation rate.

As to whether cancellations respond to the same economic indicators as the others I should have discussed this more. I have been inside the meetings and progress on several IPOs including one that was pulled in Novbember of 2000, which is why I wondered about the similarities. IPO releases aren't usually timed by economic indicators, the sole question is whether the investment bank managing the IPO (the underwriter) can find enough interest in buying the shares.

The IPO underwriting bank sends a small army of sales guys to the phones and on the road to flog shares to institutional and well-heeled investors, so I would compare the situation to a straw poll of how willing people are to take a flyer on new shares.

One could (and should) certainly ask whether those investors are just responding to leading indicators, but a quick look back at the history of 2000-2001 suggests that the IPO market starts to dry up before the leading indicators go sour. I certainly haven't done enough work to publish a paper on the topic or anything but it does seem tantalizingly like this might have meaning.

One of the best ways to test meaning is by challenging assumptions and digging for more data so I thank you for sending me back to check more!

Check out these charts on Durable Orders, Consumer Confidence, Personal Income, and Manufacturing Index. All were showing bright positive signs in 2000. The IPO market was cooling quickly in late 2000 as investors began to reign in their willingness to take a gamble on the unknown. After 2000 the market moved only sideways and down into a multi-year bear. (I could have been wrong though Paul, I hadn't done the work and checked these before publishing that last article.)

The trick is that IPOs are very sensitive. A couple years ago one would have seen the same spooky behavior we see right now. I certainly wouldn't sell any stocks right now, but if the market moves sideways for a while and the IPO market stays weak it might be worth moving defensively.

Invest Well, the FW
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Anonymous Paul Gutches said...

Thanks for the additional information and speedy reply.

So I'm intrigued now. Where would one find the total IPO's vs cancellations for every year of the 90's? I would be curious to know what the numbers look like from the early to late stages of a massive bull. I'll spare you the leg work if I could access the info myself.

So, are the underwriters of IPO's usually correct? What is their historic pattern of hesitancy vs whole hog? What are their preferred methods of testing which way the wind is blowing?


3:43 PM  
Anonymous Paul Gutches said...

Thanks for the charts too...

I am not a finance wonk by any stretch of the imagination, but it appears as if consumer confidence has consistently taken a dive following a prolonged significant divergence between the UofM and Conf Board Consumer Confidence Indexis. From the chart, looks like we are in the early stages of such a divergence now.
Is there something solid behind the patterns of tracking versus diverging?


3:55 PM  

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