Initial Public Offerings are like property sales in your neighborhood. As soon as one home owner puts up a sign and gets swarmed with interested buyers offering more than he’s asking, you can bet other home owners in the area will start thinking about selling too. Soon, “for sale” signs start dotting the front lawns looking to cash in on the demand.
That’s what’s been happening in the equity market lately, as one successful IPO after another raises more money than anyone believed they would. There’s money out there, and investors are feeling courageous and confident.
Too confident, perhaps?
Let’s look at what’s being offered lately.
Virtu Financial
If you’ve heard about the millions of dollars being made by high-speed trading but couldn’t afford the high power equipment required to do it yourself, then you might want to buy Virtu Financial – a New York high speed trading firm active in over 200 markets from stocks to commodities to futures to FOREX.
The company is gushing cash, earning $182.2 million in net income in 2013 from $664.5 million of revenue – some 27.4%. That’s better than Goldman Sach’s 23.4% income over revenue. Virtu reported in its IPO filing with the SEC that it had just one losing day in 1,238 trading days from the beginning of 2009 to the end of 2013.
How does the company make so much money? By “buying and selling large volumes of securities and other financial instruments and earning small amounts of money based on the difference between what buyers are willing to pay and what sellers are willing to accept,” it explains in its filing.
Yes, high-speed trading is controversial, which some blame for flash market crashes. But it does make money, which Virtu plans on sharing with investors through quarterly dividends. The stock is due to debuts on the Nasdaq Stock Market under the ticker VIRT in the coming months.
Though it must be remembered that IPO’s are exit strategies for early investors. Part of Virtu’s IPO proceeds will go to private equity firm Silver Lake, an early backer. The company has already paid $433 million in dividends last year to existing shareholders – which is more than two years’ worth of net income.
Castlight Health
The IPO frenzy is so hot that debutant San Francisco based Castlight Health Inc recently raised its asking price 40% from a mid-range price of $10 to $14 per share worth $140 millon.
Founded in 2008, Castlight Health develops software that allows companies to collect and more efficiently analyze healthcare data and costs. Last year’s revenues of $13 million were up from $4.2 million in 2012, thought its net loss also grew to $62.2 million, from $35 million the year before.
Even so, with health insurance gradually on its way to becoming mandatory across the nation, companies like Castlight Health should see growing demand for its products and services. The company will list on the New York Stock Exchange under the symbol “CSLT”.
In this case, the IPO money being raised is intended for working capital and other general corporate needs, including potential acquisitions and expansion plans, and won’t simply be used to compensate early investors.
TriVascular Technologies
A Santa Rosa-based maker of medical devices that help doctors repair abdominal aortic aneurysms, TriVascular Technologies plans to raise $100 million on the Nasdaq exchange under the symbol “TRIV”.
The company’s Ovation system – approved by the Food and Drug Administration in October 2012 and by the European Commission in August 2010 – has already been successfully used in clinical trials to treat more than 3,000 patients in 25 countries.
The company is not yet profitable, having lost $50.3 million last year – some 2.5 times its revenues of $19.5 million, raising its accumulated losses to $238.5 million.
While TriVascular will use some of the IPO cash to repay $4.5 million in promissory notes to the company’s previous owner Boston Scientific, the remainder of the proceeds will not be used to pay down other debt but will instead be used to expand sales and marketing, and fund additional research.
Here we have a case where the investors are in it for the long haul and are prepared to stick with the company through its growing pains – a rare and welcomed attitude that instils investor confidence.
Japan Display
If you’re going to sell your company to the public, you may as well sell it on the hottest exchange around. That’s what Japan Display Inc is doing with its $3 billion IPO offering scheduled for March 19th on the Tokyo Stock Exchange – currently the fastest growing equity market in the world, rising some 75% in just 1.5 years triggering a series of public offerings.
Yet despite being the world’s largest maker of screens for tablets and smartphones which will remain in demand for decades, analysts and bankers are concerned that Japan Display’s business is too concentrated on providing screens for Apple Inc’s tablets and phones, comprising almost a third of company sales. Screen prices falling by 34.7 percent over the past twelve months are not helping the company’s outlook either.
For this reason, the company lowered its IPO asking price, and will be reducing the portion being paid to overseas investors from 45% to 37.5%. A portion will also go Japanese state-owned Innovation Network Corp of Japan, which is reducing its ownership of the company from a majority 86.7 percent to around 33%, resulting in the doubling of its initial investment. The remainder of the proceeds will be used for capital investment and product development.
Emirates Reit
The global IPO market is so hot, even Dubai is getting in on the action. Emirates Reit – a United Arab Emirates real estate investment trust – will be offering its shares on Nasdaq Dubai in what will be the first IPO in that country in five years.
The reit hopes to raise some $136 million to acquiring additional properties and investments, as it capitalizes on a local real estate market boom that is expected to continue rising another 40% through 2014. The small nation’s GDP is expected to grow 4.7% resulting in more personal and corporate wealth, a large portion of which is ultimately invested in real estate.
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Seplat
Shell Oil and other major oil producers are selling some $3 billion worth of oil properties in the Niger Delta, one of the world’s richest oil reserves, for security challenges that foreign producers are finding difficult to manage.
Nigerian oil company Seplat is hoping to snap up some of these properties by raising $500 million on the London Stock Exchange and Lagos Stock Exchange this June.
The Nigerian government’s pressure on foreign oil producers to partner with local Nigerian companies is motivating the sale of four oil blocks – 30% owned by Shell, 10% owned by France’s Total, and 5% owned byItaly’s Eni – described as some of the easiest drilling sites in the region for their shallow waters. Shell will also be selling its 60-mile long Nembe Creek oil pipeline which is regularly attacked by locals.
(One has to wonder just how much the Nigerian government is behind such orchestrated and relentless attacks which regularly go unpunished.)
Seplat already supplies 60,000 barrels of oil per day from three other properties in the Niger Delta, and is in the midst of another block purchase from Chevron. If Seplat can get its hands on Shell Oil’s block OML 29, it would add another 62,000 barrels of oil per day, instantly doubling the company’s oil sales and revenues. It would also add 2.2 billion barrels of reserves.
Paycom
As our final pick today, Paycom – a provider of payroll and employee capital technology services – is looking to give itself a pay check in an IPO worth $100 million.
The 1998 Oklahoma City company which generated $108 million in sales in 2013 is preparing to list on the NYSE under the symbol PAYC.
Exit Signs
The IPO market is growing hotter and hotter with each passing year since the markets last imploded in 2008. In just the first two months of 2014, some 56 IPOs have already been filed – more than 27% of 2013’s total and some 46% of 2012’s total.
As noted in the graph below, the IPO market always runs hottest just before a crash, with the crashes of 2001 and 2008 as cases in point.
Source: bizmology.hoovers.com
Investors must be aware that while some IPOs do present great investment opportunities, others are simply exit strategies for early investors who backed the companies in their startup stages. When investors start tossing money at IPOs like there is no tomorrow, you can bet the activity will draw many companies into the public area when they simply aren’t prepared to go public. Their early investors are simply looking for an easy and profitable way out.
Whether you decide to invest in IPOs early on in the hopes of catching a rising elevator while it’s still at the ground floor or you decide to wait a few months to see where the stock stabilizes, one thing you should never do is jump onto an IPO bandwagon just because everyone else is.
Look at the company’s fundamentals, and don’t overlook where the IPO money is going. If too much of it is going to early investors getting out, you should not be a late investor getting in.
Joseph Cafariello
