Recent activity shows that deals are pricing at a point where the investor is nervous, but Smith said that is not necessarily a bad thing. It indicates there will be a trade-off that investors need to consider between taking risk in a market that could be going down and getting more attractive pricing on deals for companies that have strong long-term prospects. “It could be good time to go, even if it is painful,” Smith said. “Investors always like to invest when it is a buyers market.”
This year had been a strong one for IPOs, with nearly 200 deals, until September when the market began tanking. To put that in perspective, there has been only one year since the end of the dot-com boom in 2000 that has reached the 200 deal mark, 206 deals in 2014.
“The fact that the market is shaky right now, if it stays that way, we will see discounts to get deals done. It is amazing Tencent pulled off its IPO,” Smith said, but she noted it was a large deal, a billion-dollar IPO that had to be priced at the bottom of its range. “And maybe it should have priced below its range, based on how it is trading,” she said.
For Ritter the most striking stat — the one he has devoted much of his academic research over the years to exploring — is the diminishing of the IPO market over decades, as companies with $100 million or less in revenue can no longer do what was common in the 1980s and 1990s” go public, and more private buyers take out start-ups well above that size as well.
Qualtrics, which was on pace for close to $400 million in annual revenue, recently scrapped its IPO when SAP offered it $8 billion to be acquired, as much as $3 billion more than the IPO range set by bankers.
Between 2009 and 2017, there were two years during which 150 or more deals occurred (Ritter does not include in his IPO data ADRs, closed-end funds, REITs, natural resource limited partnerships or company offerings not listed by NYSE, Nasdaq or BATS). From 1980 to 2000, there were 16 years in which there were at least 150 IPOs.
“Large, visible companies such as Lyft and Uber will be valued by the market based on their business prospects,” Ritter said. “Lyft and Uber are undoubtedly somewhat subject to business cycles, but the more important issue with them is the long-term growth.”