A volatile stock market and a flood of merger activity added up to a down year for US initial public offerings. IPO volume is running 13.8 percent below last year's pace, and no US deals are set to price during the last week of 2005, when many will be on holiday.
The sluggish IPO activity came amid a rocky stock market. Concerns about rising energy costs and higher interest rates caused the Standard & Poor's 500 index to waver between positive and negative territory for much of the year. Although the index is up 4.7 percent for 2005, all of the gains have come since November.
Bankers said investors showed little appetite for the growth industries, such as technology, health care and consumer products, that typically drive the IPO business.
"The historic leading sectors in the new-issue market weren't in evidence in 2005 as they were in previous years," said Thomas Fox, managing director and co-head of US equity capital markets at UBS Investment Bank, a unit of UBS AG.
"The reason they were not in evidence in the new-issue calendar was due to the sectors' underperformance in the overall market," Fox said. "You had a situation where value was outperforming growth, and as a result the new-issue calendar reflected that activity and had a more value orientation."
The three most active sectors of the year were finance, technology - albeit at less than half 2004's level - and chemicals. Investment bank Lazard Ltd and futures exchange CBOT Holdings Inc helped boost the volume in the financial sector. As of Friday morning, 226 US IPOs this year had raised $38.69 billion in 2005, down from 239 offerings raising $44.9 billion a year earlier, according to research firm Dealogic.
Bankers noted that 2004 marked a bounce-back year after a very soft US IPO market in 2001 through 2003, which followed the bursting of the tech bubble. This year's US IPO volume is more than double the $15.9 billion in issues seen in 2003. The decline in IPOs came in a busy year for US mergers And acquisitions. M&A activity was up 28 percent in 2005, according to data from the Securities Industry Association.
Bankers said those trends were related, with some companies opting to sell out to private investors rather than go public. Team Health Inc, which provides outsourced medical services, this week formally pulled its IPO plans, following its acquisition by private equity firm Blackstone Group.
Matt Johnson, managing director and global head of equities syndicate at Lehman Brothers Holdings Inc, said the M&A boom could continue curb IPO activity. "I think we're mid-cycle in M&A," Johnson said. A number of the companies whose IPOs he worked on this year were also exploring private sales, he added.
Johnson said the choice of a buyout over an IPO appeals most to a financial backer trying to sell a company or to a corporate parent looking to spin off a division, because private sales can be done faster.
Companies that are owned by their management or founders may be more likely to opt for an IPO since they can retain a greater degree of control than they would if they sold to a single party.
Another weight on the IPO market this year was the meltdown of Refco Inc, which collapsed into bankruptcy in October, a little more than two months after its $583 million IPO. That came just as the broader stock market began a year-end rally, which otherwise would have sparked renewed interest in IPOs. "(Refco) didn't help," said Tom Taulli, an IPO analyst and founder of DealflowSearch.com Newport Beach, California. "It was a volatile market in general, which makes it difficult for IPOs."
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