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By Yelena Dunaevsky
Yelena Dunaevsky is the assistant managing editor in the Bloomberg Law’s Corporate & Transactional unit. She oversees Bloomberg Law’s reference content covering securities offerings, capital markets, corporate finance transactions, and other topics relevant to corporate practitioners. Yelena previously practiced law as a corporate finance associate at Clifford Chance.
Dropbox Inc. and other companies looking to raise cash in the public market for the first time found a warm reception in the first quarter of 2018. Many watchers of U.S. initial public offerings were cheered. But that rosy picture may not stand up to close scrutiny of several indicators, including the lackluster pipeline of announced deals and a decline in smaller IPOs.
Understandably, market regulators and participants are weary of the gradual decline over the past few years in the number of U.S. public companies. This trend has been variously attributed to the arduous and lengthy IPO process, the expense and difficulty of post-IPO periodic disclosures required of public companies, the loss of control by the company’s founders through the issuance of additional voting shares, the ready availability of private-sector funds, and the “ 7 percent IPO tax.”
Even Jay Clayton in his first speech as chairman of the Securities and Exchange Commission in mid-2017 lamented the lack of enthusiasm of a “large number of companies, including many of our country’s most innovative businesses,” for going public.
And indeed many large companies, such as Spotify, which recently sidestepped the traditional IPO process in favor of a direct listing, are so well funded that the fundraising aspect of the IPO has no appeal for them. As a result, regulators, bankers, private companies, securities exchanges, and investors have been watching the developments in the IPO market for signs as to whether the market will recuperate to its heyday of 2014 or decline further.
The signals looked good — at least initially. When 2017 finished stronger than 2015 and 2016, many rejoiced with the anticipation of a revival. That enthusiasm carried through the first quarter of 2018 with a strong performance in the number of deals and dollar amount raised. But the pipeline of announced deals and the shift toward larger IPOs are causing new doubts. Let’s take a more detailed look at the numbers.
Sixty IPOs priced in the first quarter of 2018, raising $18.93 billion, on target to surpass not only the 2015 and 2016 numbers, but also the 2017 numbers, in both deal count and dollar amount raised. The average deal size in the first quarter of 2018 was $315.5 million, up by 41 percent from $224.1 million in 2017, and by 70 percent from $185.5 million in 2016.
The three largest IPOs of the first quarter of 2018 were by PagSeguro Digital Ltd. (priced Jan. 23 and raised $2.61 billion), iQiyi Inc. (priced March 29 and raised $2.25 billion), and ADT Inc. (priced Jan. 18 and raised $1.47 billion).
So far so good. However, focusing on the bottom range of the IPO market ($1 million to $100 million), it is clear that the smaller IPOs have taken a backseat to larger deals. Perhaps it is not surprising that that would be the case, considering the high costs of the IPO process and the amount of time and effort required of the company’s management. It almost makes no economic sense for a company to go through all the trouble of an IPO to raise just a few million dollars. The data supports this conclusion.
IPOs in the $1 million-to-$100 million range represented a smaller percentage (36.7 percent) of total priced IPOs in the first quarter of 2018, compared with the previous four years, indicating a trend toward fewer IPOs in this dollar range.
There was a sizable increase in 2017 and in the first quarter of 2018, compared with the previous three years, in the percentage of IPOs in the $100 million-to-$500 million range. The first quarter of 2018 also witnessed a significant increase in the percentage of IPOs in the $1 billion-to-$10 billion range (7 percent of total IPOs), a larger percentage than in the previous four years.
Twenty-two of the 60 IPOs in the first quarter of 2018 (37 percent) were in the $1 million-to-$100 million range by offer size; 29 (48 percent) were in the $100 million-to-$500 million range; five (8 percent) were in the $500 million-to-$1 billion range; and four (7 percent) were in the $1 billion-to-$10 billion range.
And what about the IPO pipeline? It’s not looking too promising.
Although the 57 IPOs that were announced in the first quarter of 2018 indicate a potentially strong pipeline for the year, they are not breaking records in deal count or potential dollar value. The announced deal value for the 57 IPOs was $12.41 billion. At this tepid rate, the 2018 performance is unlikely to beat the 2017 announced deal value of $64.2 billion. The three largest announced IPOs of 2018 were by iQiyi Inc. (announced Feb. 27, priced March 29, and raised $2.25 billion), Dropbox Inc. (announced Feb. 23, priced March 22, and raised $869.40 million) and DocuSign Inc. (announced March 28, priced March 26, and raised $629.30 million).
In the first quarter of 2018, the Diversified sector continued the trend from 2017, replacing the Technology sector among the top three sectors by number of IPOs (10). The Technology sector delivered 21 IPOs in 2015 and 17 IPOs in 2016, raising $6.8 billion and $1.9 billion, respectively, but was not in the top three sectors, by number of IPOs or dollar amount raised, in either 2017 or the first quarter of 2018.
The Consumer, Non-Cyclical sector was the most active in the first quarter of 2018, with 17 IPOs. However, IPOs in the Financial sector raised the most capital ($4.8 billion). As in the previous four years, the Consumer, Non-Cyclical sector outperformed the other industry sectors by number of IPOs in the first quarter of 2018.
The top IPOs by dollar value in each of the top three sectors in the first quarter of 2018 were by Corp America Airports SA (Consumer, Non-Cyclical sector, priced Feb. 1, and raised $486 million), Platinum Eagle Acquisition Corp. (Diversified sector, priced Jan. 11, and raised $325 million), and PagSeguro Digital Ltd. (Financial sector, priced Jan. 23, and raised $2.61 billion).
There is one type of IPO that has been doing exceptionally well over the past couple of years, the SPAC IPO. A SPAC is a type of blank-check company that pools funds to finance M&A transactions. After experiencing a surge in 2007, the SPAC IPO fell into disrepute during the financial crisis. However, over the past few years, and especially in 2017, SPAC IPOs have been making a comeback. The 2017 numbers in deal count and value were staggering by comparison: the dollar amount raised by SPAC IPOs in 2017 ($9.84 billion) jumped by 183 percent from 2016 ($3.48 billion) and by 152 percent from 2015 ($3.90 billion). SPAC IPO numbers in 2018 are on target to match or even exceed the peak numbers of 2017.
Twelve SPAC IPOs priced in the first quarter of 2018 and raised $2.14 billion. They represented 20 percent of the total IPO market by deal count and 11 percent of the total IPO market by dollar amount raised. The three largest SPAC IPOs in the first quarter of 2018 were by Platinum Eagle Acquisition Corp. (priced Jan. 11 and raised $325 million), One Madison Corp. (priced Jan.17 and raised $300 million), and Nebula Acquisition Corp. (priced Jan. 9 and raised $275 million).
And which law firms stand out in their representation of IPO issuers and underwriters in various industry sectors and market slices?
Latham & Watkins and Ellenoff Grossman & Schole participated the most sector-specific deals in the first quarter of 2018 (five IPOs each) in the Consumer, Non-Cyclical sector and the Diversified sector, respectively. Simpson Thacher & Bartlett and Davis Polk & Wardwell led the Industrial sector with two IPOs each, raising well over $1 billion each. Wilson Sonsini Goodrich & Rosati and Simpson Thacher & Bartlett collaborated on the largest IPO in the Technology sector, the Dropbox IPO.
Davis Polk & Wardwell and Pinheiro Neto (advising the underwriters) and Shearman & Sterling, Mattos Filho Veiga Filho Marrey Quiroga, and Conyers Dill & Pearman (advising the issuer), participated in the largest IPO of the first quarter of 2018, PagSeguro Digital Ltd.
Ellenoff Grossman & Schole led the smaller market range ($1 million to $100 million) with seven IPOs, raising $151.7 million. Maples & Calder conducted the most IPOs (eight) in the $100 million-to-$500 million range, raising $1.5 billion.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
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