The bearish market has made it harder for new companies to convince investors to buy their stock, especially if they plan to use most of the cash raised from an IPO to pay down debt and have no compelling growth story to tell.
Companies often use the proceeds from an initial public offering to pay off creditors or inside stakeholders such as venture capitalists, banks or buyout firms. "It's fairly common procedure with buyout-backed IPOs to borrow money to pay a dividend to pre-issue shareholders and use the IPO proceeds to pay debt incurred," said Jay Ritter, a professor of finance at the University of Florida, who focuses on IPOs.
Verso Paper Corp, which went public last month, said in its regulatory filing it would use the money raised in its IPO to mostly pay down debt incurred in making payments to its equity holders.
RHI Entertainment Inc, a producer of made-for- television movies that went public earlier this week, also said in its regulatory filing it would use the money raised in its IPO to pay down debt. The public offerings of both companies are among the bottom performers in the past 12 months, according to Renaissance Capital's IPOHome, which provides IPO research.
The shares of Verso, which reported an annual loss of $110 million for the year ended September 2007, closed nearly 17 percent below their offer price on the first day of trading, and have dropped further since then.
Meanwhile, the shares of RHI priced below the expected range of $16 to $18 per share and the company sold fewer shares than expected, signs that analysts said indicated weak investor interest. Cautious investors are far less indulgent with their cash in a down market and clamp down on risk taking, analysts said.
In a hot market, with indexes surging upward and investors spoilt for choice with new offerings, they are likely to buy a variety of stocks hoping for a quick route to big profits. They are also less concerned about how a company plans to use the cash and willing to gamble. "In a bull market, anything goes," said John Fitzgibbon, who runs the IPO tracking website IPOScoop.com. But when the market turns south, "people get religion, because now they have to explain things."
Given current market conditions, if investors do buy the stock of a company that intends primarily to pay debt, they are far likelier now to scrutinise its financial data, its plan of action after paying the debt and the overall growth prospects for the industry.
If a company does not adequately explain how it is going to use the money in its regulatory filings, the chances are investors will not touch the stock. "Wall Street is all about numbers and a clean balance sheet goes a long way in this market," Fitzgibbon said.
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