The IPO Buzz: The Truth About IPO Markdowns

In fact, the numbers over the past decade tell a sobering tale. The average opening-day gain for IPO “markdowns” was about 2 percent. In contrast, the IPOs priced within or above their original filing range scored an average opening-day gain of almost 37 percent. (More on this trend below when we delve “behind the numbers.”)

 

Let’s take a closer look at this recent traffic.

 

Rhino Resource Partners LP (RNO), a Kentucky-based coal mine limited partnership, priced 3.24 million shares at $20.50 each on Sept. 29. The deal had been reduced from 3.75 million shares at $19 to $21 each. The IPO opened on Sept. 30 at $21.10 and closed its opening day at $21.90, UP $1.40 per share, or UP 6.83 percent from its initial offering price.

 

Daqo New Energy (DQ), a China-based manufacturer of polysilicon for solar power solutions, priced 8 million shares at $9.50 each on Oct. 6. The deal had been reduced from $10.50 to $12.50 per share. The IPO opened on Oct. 7 at $9.98 and closed its opening day at $10.25, UP 75 cents per share, or UP 7.89 percent from its offering price.

 

Ellington Financial LLC (EFC), a Greenwich, Connecticut-based specialty finance company formed as a real estate investment trust, or REIT, priced 4.5 million shares at $22.50 each on Oct. 7. The deal had been reduced from 7.7 million shares at $25 to $27 each. The IPO opened on Oct. 8 at $21.50 and closed its opening day at $21.75, DOWN 75 cents per share, or OFF 3.33 percent from its offering price.

 

But there’s more to the reality check story.

 

From 2000 through 2009, bankers priced 1,621 IPOs (excluding unit offerings consisting of common stock with warrants), according to the U.S. Securities and Exchange Commission filings. Of the 1,621 IPOs, a total of 514 deals were priced below their original filing ranges — either reduced in price, reduced in the number of shares being offered — or both.

 

There was not much of a pop in the aftermarket. The average opening-day gain for the 514 “marked-down” deals was 1.94 percent.

 

On the other hand, the 1,107 IPOs that were priced within or above their original filing ranges saw an average opening-day gain of 36.5 percent.

 

This week’s IPO calendar shows seven deals looking to raise about $1.4 billion. That looks impressive, but a closer look shows a slightly different story. There are three new faces at the IPO door. The other four are carry-overs from the past.

 

On Wall Street, though, sometimes a new face emerges as a favorite. Here’s the name that popped up in the general consensus taken from investment professionals.

 

NetSpend Holdings (NTSP – proposed) is an Austin, Texas-based provider of general-purpose reloadable prepaid debit cards and other financial services for consumers who do not have a traditional bank account, and those who rely on alternative financial services. The company has about 2.1 million active cards, with a gross dollar volume of debit transactions and cash withdrawals of $8.3 billion for the 12 months ended March 31, 2010.

 

For the six months ending June 30, 2010, NetSpend reported net income of $11.1 million on revenues of $136.9 million, compared with net income of $11.1 million on revenues of $109.6 million for the same period a year ago. (Worth noting: Yes, the net income for NetSpend is the same for both comparable periods. This is not a misprint.)

 

The Dow Jones U.S. Consumer Finance Services Index (DJUSSF) has been an underperformer this year. On Friday, the index closed at 64.48, DOWN 7.21 percent for the year, while the S&P 500 Index (.INX) was UP 4.49 percent for the year.

 

The company plans to price its IPO of 18.5 million shares at $10 to $12 each on Thursday evening. It expects to start trading on Friday, Oct. 15.