IPOs Riding High After First-Half Surge

It is shaping up to be the best year for initial public offerings since the mania of 2000, with deals in the first half of 2004 surpassing those done in all of 2003.

This year, 88 U.S. IPOs have raised $16.23 billion, compared with 10 deals that raised $2.33 billion in the same period last year, according to preliminary figures compiled on Thursday by Thomson Financial.

Morgan Stanley (MDW) ranked as the top bookrunner for first half of the year, while Goldman Sachs Group Inc. (GS) came in second and J.P. Morgan Chase & Co. (JPM) was third, according to those preliminary figures.

With close to 200 IPOs now waiting in the wings, the question remains how will the IPO market perform as the year unfolds and the highly anticipated offering of Web search giant Google (search) comes to market.

"We may be in a situation where if you have a very well-run company, with a good track record, you are going to have access to capital," said Rick Bartlett, co-head of U.S. equity capital markets at Citigroup. "If you don't have those characteristics, you're going to have a tougher time."

IPOs are back from the nearly flat-line level of the first half of 2003, but the market is not looking at deals through rose-colored glasses as it did in the heyday of the late 1990s.

As the year progressed, many IPOs priced below estimates. The biotechnology sector, where investors are often placing a bet on a company that has yet to turn a profit or get approval for its key drug, was hit particularly hard.

For instance, CoTherix Inc (CTRX), which focuses on developing products for the treatment of cardiopulmonary and other chronic diseases, pulled its offering after a number of deals in its sector priced below estimates.

"It got increasingly difficult as the second quarter came to a close from a pricing dynamic," Bartlett said. "We started the year with a stronger momentum than we ended the second quarter."

In the second quarter, investors gave muted responses to the market debuts of Genworth Financial Inc. (GNW) and tax preparer Jackson Hewitt Tax Service Inc. (JTX), which were spin-offs of larger parent companies and mainly mature businesses.

The money raised in those deals went into the pockets of the parent companies — in these cases General Electric Co. (GE) and Cendant Corp. (CDT) — leaving investors that bought the IPO shares shouldering the risk of the newly public company.

Investors did indulge in deals of well-known companies with hot growth prospects, sending shares of Salesforce.com (CRM), up 56 percent and Blackboard Inc. (BBBB), up 43 percent.

"The markets continue to be highly selective," said Mark Hantho, head of North American origination for global capital markets at Morgan Stanley.

There are 184 IPOs worth $44.56 billion registered with the SEC, according to data provided by Dealogic Thursday, with analysts and bankers expecting a very busy summer.

"Provided the market is in decent shape, we expect to see many issuers advance their financing needs ahead of the seasonal August slowdown," Hantho said.

But, with deals being judged by their fundamentals, not all of those IPOs are expected to make it to market.

"Investors are still very wary of every deal that is put before them," said David Menlow, president of IPOfinancial.com.

That means some of those potential IPOs could turn into merger and acquisition targets, bankers said, much AOL's announcement Thursday that it would buy online marketing firm Advertising.com although Advertising.com previously planned to hold an IPO.

And IPOs are expected to feel the heat from the 800-pound gorilla on the horizon — the highly anticipated initial public offering of Google. Analysts said companies could rush to get their deals out ahead of the offering or else delay until Google-mania has passed.

"The summer is best described as all Google, all the time," Menlow said.