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 As the debut approached this week, the bankers' job only got harder.
On Tuesday, Facebook Inc said it would pay $2 billion for Oculus VR,
a two-year-old virtual reality startup that has yet to put a product
on the market. Facebook CEO Mark Zuckerberg described the deal as
the social media giant's desire to bet on "the platforms of
tomorrow."
But for some investors, the deal brought back memories of the
Internet boom and bust in 1998-2001, where profitability and other
financial fundamentals of companies took the back seat to a raging
fad about anything with a dotcom identity, according to the source.
Bankers underwriting King Digital's offering had to call in favors
with investors who had received large allocations in previous
successful IPOs, the source said. As a result, King Digital priced
the offering at the mid-point of its range of $21 to $24. But its
shares tanked in Wednesday's debut, falling 16 percent and fell
further on Thursday and Friday. King Digital could not be reached
immediately for comment.
Wall Street bankers are now looking at the disappointing opening as
a sign that investors are getting more cautious about the IPO
market, especially when it comes to technology and biotechnology
stocks. Although bankers said companies waiting in the wings so far
seemed to want to forge ahead with their IPO plans, the realization
is likely to moderate expectations on the size of offerings and
valuations.
"You realize that people are going to be a little bit more cautious.
You realize that the valuation needs to be reflective of that
cautiousness," said Sam Kendall, global head of equity capital
markets at UBS AG.
That would mark a sharp turning point for the IPO market, in which
investors have been fed a steady diet of new public offerings this
year from companies yet to turn a profit. More than 50 IPOs have
priced in 2014, and two-thirds of those are unprofitable, according
to Renaissance Capital, an IPO investment advisor.
Still, companies that have gone public this year have seen their
shares rise 33 percent on average from their offer prices, according
to Dealogic.
NEXT TEST
"The market has gotten ahead of itself, and you're seeing a pause in
speculation, especially for biotech and some of these new tech
names," said Eric Green, senior portfolio manager and director of
research at Penn Capital Management in Philadelphia, which oversees
$7.5 billion.
"Other issues, like Ukraine or whatever, end up being an excuse to
take money off the table, but the fundamentals behind these
companies haven't changed, just the valuations over them. Those are
coming back to earth," he added.
The next test for the market could come as early as next week, when
a series of technology companies are due to list, including online
food delivery service Grubhub.com, healthcare IT company IMS health,
and software maker Five9.
Bankers said the investor caution is more of a correction rather
than a sign that the market was shutting down for new offerings.
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While investor worries about frothy valuations is giving pause to
some companies in the technology and biotech sectors, companies in
other industries are still forging ahead, betting that there will be
enough demand for their stock.
In financial services, for example, the U.S. Treasury announced
plans to sell nearly 23 percent of Ally Financial Inc through an
initial public offering to raise as much as $2.66 billion.
One source familiar with the situation said by buying Ally investors
would pay for "a value story," unlike "the growth story" sold in
technology and biotech IPOs.
Still, both the Treasury and Ally would have liked to be able to
sell the entire government stake in the bank in one go, sources have
previously said. The Treasury will still be left with a stake in the
bailed-out bank after the IPO.
A spokesman for the U.S. Treasury and a spokeswoman for Ally
declined to comment.
Separately, sources familiar with the matter said on Thursday that
aircraft lessor Avolon was preparing for an IPO this year as it
looked to take advantage of a recent boom in aircraft finance,
driven by an expectation that air travel will continue to grow.
Even in the technology sector, bankers said companies such as
Alibaba Group Holding Ltd, the Chinese e-commerce company, are
likely to find sufficient demand when they come to market.
Alibaba is expected to file for a listing in the United States as
early as April with IPO proceeds that could exceed $15 billion.
"All kinds of industries have been represented in IPOs, but it's the
splashy Internet ones that have been in the news," said John Carey,
portfolio manager at Pioneer Investment Management in Boston, which
has about $220 billion in assets under management.
"People are exercising caution, and I'd be more concerned if they
were willing to pay anything at all," Carey added. "If demand was
robust for anything that came down the pike, that would trouble me."
(Additional reporting by Peter Rudegeair and Ryan Vlastelica;
editing by Paritosh Bansal, Martin Howell)
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