The IPO Buzz: What Markdowns Mean

Veraz Networks, a San Jose, California-based provider of VoIP switches and gateways for wireless and wireline carriers, priced 9 million shares at $8 each to raise $72 million on Wednesday evening. That was below its filing range of $10 to $12 per share to raise $99 million. On Thursday morning, it opened at $8 and closed at $7.80, a broken deal.

 

The consensus of IPO professionals, whose input makes up the Street Consensus of Opening Premiums or SCOOP ratings for short, initially had given the deal a half-point opening premium (or 2-Star rating). That call evaporated when the deal was priced below range: “Cut a deal, cancel my order.”

 

By cutting a deal, bankers lower an IPO’s pricing terms to find enough buyers to get it done. As a result, there is usually no real aftermarket demand for the IPO. Their opening-day performances are revealing.

 

Let’s back up a bit and take a look at the IPO traffic so far this year and last year’s volume to see how cutting a deal actually affects its opening-day performance.

 

From Jan. 24, 2006, (the year’s first IPO) through April 5, 2007 (the most recent IPO), bankers priced 246 IPOs, according to Securities and Exchange Commission filings. This figure excludes unit offerings, bank conversions, closed-end funds, investment companies and American Depositary Shares being offered in the United States for the first time when their underlying shares are already traded on their respective national stock exchanges. (These are not IPOs. They are secondary offerings.)

 

IPOs priced below filing range:

 

IPOs priced within or above filing range:

 

Conclusion: Cut a deal, cancel my order!

 

Naturally, there were some notable pops among the cut deals. Generally, they were biopharmaceutical and medical device companies. In some cases, the IPO price cut gave the deal a “dead-cat” bounce in the aftermarket. Here are a couple of examples:

 

Artes Medical (NASDAQ: ARTE) is a San Diego, California-based medical technology company that develops injectable products for the dermatology and plastic surgery markets to smooth out or remove facial wrinkles, also known as “smile lines.” Artes Medical priced 4.6 million shares at $6 each to raise $27.6 million on Dec. 19, 2006. That was sharply below its original filing of 4.6 million shares at $12 to $14 each to raise $59.8 million. The IPO opened at $6.70 and closed its opening day at $7.67, UP 27.8 percent from its offering price.

 

On Thursday, April 5, 2007, Artes Medical closed at $8.10, up 35 percent from its offering price.

 

Optimer Pharmaceuticals (NASDAQ: OPTR) is a San Diego-based biopharmaceutical company that develops anti-infective products to treat hospital-acquired diarrhea, travelers’ diarrhea, breast cancer and osteoarthritis. Optimer Pharmaceuticals priced 7 million shares at $7 each to raise $49 million on Feb. 8, 2007. That was far below its original filing of 5.25 million shares at $12 to $14 each to raise $68.3 million. The IPO opened at $7.50 and closed its opening day at $8.50, UP 21.4 percent.

 

On Thursday, April 5, 2007, Optimer Pharmaceuticals closed at $9.90, up 41.4 percent above its offering price.

 

All you need to know about an IPO’s opening-day performance is on the front page of its prospectus.

 

If the pricing terms are below its filing, don’t look for an opening-day moonshot.

 

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