February 24, 2010
IPO Market Vigilantes: Narrowing the Valuation Disconnect
Sensing vulnerability among companies needing to raise cash in the public market, IPO market vigilantes began pushing back on new issue valuations in late 2009. An unusually-high 69% of year-to-date offerings have priced below the expected range, well above the 28% average for the 2001-2009 period, as stingy investors and renewed economic uncertainties have backed issuers into a corner. The average deal is getting done at a sizeable -16% haircut to the proposed midpoint (the post-tech-bubble average is -3%) but these discounted valuations have not yet translated into higher near-term returns.
While the indiscriminate pricing pressure has impacted the majority of recent IPOs, our research shows that companies with strong fundamentals are still outperforming in the aftermarket. Additionally, our data from the last two decades demonstrate that broader IPO market performance can improve rapidly and significantly following periods of harsh valuation corrections, as underwriters react to buyers’ pricing demands.
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