How far have expectations fallen?
The ecstatic hype about Thursday’s robust stock market debut of Rosetta Stone – only the fourth IPO this year in the US markets – has turned into a widespread prediction that equity capital raising is back. It has also overshadowed the fact that the language software provider had a number of special features. That, together with far more positive-than-deserved coverage of the debut of Bridgepoint Education, the online college which also chose to float this week, and the successful IPO of Chinese videogame maker Changyou at the start of April, and one could be forgiven for thinking the good times are back.
Shares in Bridgepoint rose about 8.5 per cent on the day of their debut, but only after the offer price had been slashed in order to lure investors. As BusinessWeek noted earlier, Bridgepoint raised $141.8m on April 15 – less than the company and private equity investor Warburg Pincus expected to raise. To attract investors, however, Bridgepoint had to cut about 30 per cent off its offering price to $10.50 per share, and on its first day of trading, the stock closed at $11.10.
Rosetta Stone’s debut, in comparison, was indeed impressive, its shares rising almost 40 per cent to become the best performing IPO in a year.
As the FT reports on Friday, Rosetta’s shares started trading on the New York Stock Exchange at $25 on Thursday, well above its above its IPO price of $18. The stock continued to rise through most of the day before ending at $25.12, up 39.6 per cent from its floatation price. The expected offer range was $15 to $17, set by underwriters Morgan Stanley and William Blair & Co.
USAToday was moved to predict that Rosetta Stone’s IPO success “could signal a thawing of the IPO market and signal that investors are willing to take on more risk”; while the FT noted: “In another encouraging sign for companies considering access the public equity markets, Rosetta’s was also the first IPO to price above its expected range since May last year”.
But consider: Rosetta Stone had a powerful advantage in the dearth of publicly-held competitors. Its nearest and strongest rival, Berlitz, is privately held. And as DealBook noted ahead of the IPO, the relatively small size of the deal’s float helped Rosetta Stone command a strong price, though analysts said the company could have raised far more money in the oversubscribed deal.
In addition, while the Virginia-based company sells language instruction products in 31 languages, Rosetta Stone has stepped up efforts to limit its exposure to cash-strapped consumers by focusing on sales to corporations and the federal government, notes DealBook. It plans, for example, to develop an Arabic learning product for the US Army. So far, it seems to have played its cards shrewdly. In 2008, Rosetta Stone’s revenue rose 52 per cent to $209.4m from 2007, with net income of $13.9 million, according to a regulatory filing.
One key to its popularity with investors, according to BusinessWeek, is “brand awareness”. The journal quotes Scott Sweet, senior managing partner of IPO Boutique, saying that, in contrast to Bridgepoint, which faces several large competitors in the for-profit education industry, Rosetta is the first outfit of its kind to go public, with “brand awareness” more than seven times that of its closest rival.
Separately, Sweet told USA Today that Rosetta Stone has “four things going for it”: high profitability, low debt, great brand awareness and excellent growth prospects.
But the real question is, can the IPO market really emerge from its deep slump? According to Dealogic, in the first quarter of 2009, IPO volume was down 95 per cent from the same period a year ago. Notes BusinessWeek:
The main culprit, observers say, has been the broader stock market, often in steep decline and extremely volatile. In tumultuous market conditions, when investors won’t take risks on new IPOs, “everything just goes on hold,” says Smith. “For the IPO market to come back, you don’t need a booming market. You need a stable market.”
But for now, investment bankers selling IPO shares may have what they wanted—at least temporarily, and at least while the S&P 500 is up almost 25 per cent since its bear market low on March 9. William Smith, president and chief executive of Renaissance Capital, predicts that a “huge backlog of companies” will start preparing for IPOs, telling BusinessWeek:Expect new financial firms unburdened by toxic assets, he says, as well as companies benefiting from the Obama administration’s emphasis on infrastructure spending and the environment. Smith also believes that private equity firms are readying IPOs of large companies taken private in leveraged buyouts in recent years.
But before investors start rushing for whatever prospectuses are emerging, consider the view of IPO Boutique’s Sweet, who warns that many investors see more opportunity in established publicly traded companies than in risky IPO names. And while Rosetta may represent a success story, the low offering price for Bridgepoint “shocked many people,” he adds.
While these companies go public, many others that have cancelled IPOs await better market conditions, BusinessWeek adds. On April 13, Current Media, an internet and cable company backed by former Vice-President Al Gore, withdrew its IPO. On April 14, trucking operator Western Express did the same. So, the report concludes, an IPO recovery will depend on whether the stock market sustains its recent rally or slips back into the wild volatility of the previous six months. In any case, says IPO analyst Tim Walker, of Hoover’s, IPO investors now have lower expectations and the “buzz-driven or sexy IPO,” trading at a premium valuation may be a rare sight even if offerings do revive somewhat.
Related links:
Rosetta Stone rises 40% in stock market debut - FT
Are IPOs making a comeback? - BusinessWeek
Changyou’s IPO proves a thing or two - FT Alphaville
Rosetta Stone IPO prices above estimate range – DealBook
Did Rosetta Stone unlock locked down IPO market? - USA Today