A dearth of large deals left US initial public offering volume slightly lower in the first quarter of 2006, but a backlog of heavyweight offerings has set the stage for a more robust second quarter.
A total of 53 companies raised $10.41 billion in the first quarter, 4.6 percent below the $10.91 billion raised by 46 companies in the first quarter of 2005, according to data from Dealogic.
"It's a function of who happens to be going public in the quarter," said David Topper, managing director and head of equity capital markets for the Americas at J.P. Morgan Chase & Co.
"There was only one deal in the first quarter of '06 that was even a billion dollars and there's only a couple of them above $500 million," Topper said.
The largest first-quarter IPO was Mexican airport operator Grupo Aeroportuario del Pacifico, which sold $1 billion in shares and American Depository Receipts. In the first three months of 2005, chemicals maker Huntsman Corp raised $1.59 billion. The largest IPOs expected in the coming months are No 2 US credit card association MasterCard Inc, which plans a $2.45 billion offering that would be largest offer since May 2004, and Science Applications International Corp, a provider of technical services to the US military and government, which plans a $1.73 billion offering.
While the lack of billion-dollar deals in the first quarter is one reason for the decline in the amount of funds raised through US IPOs, investment bankers said there's another important factor at work - the growing pool of private investments and a rise in mergers and acquisitions.
Through the first three months of 2006 US M&A activity was up 65.3 percent by value from prior-year levels, according to Dealogic.
"There's so much liquidity on the buy side in terms of strategic buyers and financial buyers that there's a ready-made alternative to an IPO," said Thomas Fox, managing director and co-head of US equity capital markets at UBS Investment Bank, a unit of UBS AG.
The strongest first-quarter IPO performance was that of Chipotle Mexican Grill Inc, a fast-growing casual dining chain spun off by McDonald's Corp. The shares doubled in value from their $22 IPO price in their debut and have since risen to $55.80 on the New York Stock Exchange. That performance could spur other consumer-focused companies with solid growth tracks to pursue IPOs.
"Growth is back and I think a lot of corporations that are looking at the market feel that they'll get paid for that growth more than they would a couple of years ago," said Mark Hantho, managing director and head of global equity capital at Banc of America Securities, a unit of Bank of America.
The overall backlog of companies waiting to make their IPOs is up substantially from where it stood at this time a year ago. As of Friday, 93 companies had filed papers with the US Securities and Exchange Commission to raise $12.78 billion through IPOs.
That's up from 71 companies who had filed to raise $8.02 billion a year earlier, but down from a recent peak of 129 companies registered to raise $21.1 million in October.
The sectors with the largest value of deals expected are oil and gas, with eight companies planning to raise $2.32 billion; finance, with 25 companies planning to raise $1.77 billion, and real estate and property, with eight companies aiming to raise $1.58 billion. One event that could open the floodgates and prompt those companies to move quickly on their offerings would be if the Federal Reserve breaks its pattern of interest-rate hikes in the coming months, bankers said.
"The interest-rate pause that has been much anticipated would be great for the issuance market in general and certainly for IPOs," said Matt Johnson, managing director and head of global equity capital markets at Lehman Brothers.
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