The IPO Buzz: Recipe for Recovery

The IPO market’s reaction to last week’s wild ride was classic. When the stock market falls, IPOs run for cover.

 

Last week had 12 deals on the calendar. By week’s end, 10 had been postponed and the two that made it out the door had been reduced in size. They raised $602.5 million of a planned $730 million.

 

Let’s flip back through the pages of Wall Street history and look at the last three speed bumps on the IPO highway. They were in 2008, 2000 and 1998. Within those years are clues to the future.

 

On Dec. 26, 2007, the Nasdaq Composite closed at 2,724.41 and bottomed at 1,268.64 on March 9, 2009, a 53.4 percent slide.

 

The slide took 15 months. (You might note this number.)

 

The previous year, 2007, the IPO calendar produced 277 deals and then dried up. In 2008, the calendar produced 50 deals, according to the U.S. Securities and Commission filings.

 

The calendar started coming to life in August 2009 and, by year’s end, produced 47 of the year’s 61 deals. The following year – 2010 – the calendar produced 164 IPOs.

 

The IPO comeback started five months after the stock market’s closing low. (You might note this number.)

 

On March 10, 2000, the Nasdaq Composite Index closed at 5,048.62 and bottomed at 1,114.11 on Oct. 9, 2002, a 77.9 percent plunge.

 

The slide took 31 months. (You might note this number.)

The previous year, 1999, the IPO calendar produced 543 deals and dried up by the end of 2000. Only eight deals were priced in December 2000.

 

The calendar started coming to life in October 2003 and, by year’s end, produced 53 of the year’s 84 IPOs. In 2004, the calendar produced 248 IPOs.

 

The IPO comeback started 12 months after the stock market’s closing low. (You might note this number.)

 

On July 20, 1998, the Nasdaq Composite Index closed at 2,014.25 and bottomed at 1,419.12 on Oct. 8, 1998, a 29.5 percent decline.

 

The slide took three months. (You might note this number.)

In 1998, the IPO calendar produced 326 deals through August and three in September -– you could count them on one hand.

 

The calendar started coming to life in November 1998 and produced 45 IPOs by year’s end.

 

The IPO comeback started one month (five weeks) after the stock market’s closing low. (You might note this number.)

 

The recovery ratio runs 3 to 1. For every three months of a stock market decline, it takes one month for the IPO market to stage a comeback.

 

Now let’s flip back to the present to take another look at last week’s wild ride and tie the two together.

 

It’s been said before, but worth repeating:

(At times such as this, I’d rather listen to gray hair instead of a peach-fuzz face on TV telling me what’s going to happen.)

 

The consensus among the gray beards, each with decades of experience, is when you get a highly volatile stock market after a period of a decline, it generally indicates a bottom.

 

Consider the last seven trading days for the Dow Jones Industrial Average: On Thursday, Aug. 4, down 513 points; Friday, Aug. 5, up 61 points (coming off an intraday loss of 305 points); Monday, Aug. 8, down 635; Tuesday, Aug. 9, up 430; Wednesday, Aug. 10, down 520; Thursday, Aug. 11, up 423, and Friday, Aug. 12, up 126 points.

 

It doesn’t get more volatile than this.

 

But none of the gray beards expect a wild, sharp recovery. They see it more like Aesop’s fable of the tortoise and the hare. Their money is on the tortoise.

 

Now don’t go away, folks.

 

The calendar does have one deal this week -– maybe.

 

Tudou Holdings Limited, based in Shanghai, is a provider of online videos in China. The company, founded in 2005, has over 700 employees. Tudou reported a net loss of RBM336 million ($51.3 million) on revenues of RBM79.4 million ($12.1 million) for the three months ended March 31, 2011, compared with a net loss of RBM38 million on revenues of RBM29.8 million for the same period a year ago.

 

Tudou plans to offer 6 million American Depositary Shares (ADS) at $28 to $30 each to raise about $174 million. The company expects to offer 5.57 million ADS and selling shareholders expect to offer 430,000 ADS.

 

The IPO is expected to be priced on Tuesday evening, Aug. 16, and to trade on Wednesday morning on the NASDAQ Global Market under the proposed symbol “TUDO.” Joint-lead managers are: Credit Suisse and Deutsche Bank Securities.

 

(Note: The company reported an accumulated deficit of $174.5 million on March 31, 2011.)

 

But there has been talk that Baidu (BIDU), a provider of Chinese and Japanese language Internet search services, might acquire Tuduo. If so, there goes this week’s IPO calendar.

 

After this week, the IPO market goes into an annual close-down period from mid-August through mid-September — a four week late-summer slumber without IPOs.

 

Remember the ratio of 3 to 1?

 

The stock market’s most recent closing highs were set in late April – three-and-a-half months ago. If the stock market’s lows have been seen, when you come back in mid-September, there could very well be an IPO calendar waiting for you.

 

There’s a lot in the pipeline. Stay tuned.