As U.S. IPO Market Holds Steady, Investment Banks Seek Top Talent
Investors and analysts from Wall Street to Washington have voiced concerns that the Sarbanes-Oxley Act of 2002 is deterring initial public offerings. Despite the gripes, however, 2006 turned out to be a good year for the U.S. IPO market. And despite the late July stock sell-off, 2007 is also off to a strong start. In fact, IPO volume this year hit its highest level since 2000, according to data from Dealogic. But the IPO market has not been immune from the recent plunge in stocks. Feeling shakey, investors may be less likely to venture out into the IPO market. Underwriters have adjusted, in some cases cutting their offering prices. Although weaker deals may fall by the way side, analysts say investors could see more high-quality offerings. Now, with securities underwriting volumes holding their own, executive recruiting firm, A.E. Feldman, says there is growing demand for experienced investment bankers with solid track records in leading IPOs.
Since the Sarbanes-Oxley Act was signed into law back in 2002, both Wall Street and Washington have been worrying that increased regulation has been sending many of the world’s biggest initial public offerings overseas, particularly to London’s Alternative Investment Market (AIM).
The costs of going public have become particularly prohibitive for smaller businesses in the United States. The average cost of SOX compliance for companies with less than $1 billion in annual revenue held steady at $2.8 million over the past two years, but that’s a staggering 171% increase since 2003. For companies with annual revenue topping $1 billion, the average cost of compliance also increased 54% from 2003 to 2006.
In 1995, the London Stock Exchange launched AIM for the small cap and micro cap space. AIM has lower entry and maintenance requirements for listed companies, making it a viable alternative to the LSE. Also, listing on AIM can help U.S. based companies bypass SOX requirements and gain access to public capital. AIM’s listing requirements are quite liberal, even by pre-SOX standards. They include no minimum shares to be in public hands, no trading record requirement and no prior shareholder approval for transactions.
But the New York Stock Exchange hosted the largest proportion of IPOs by value in 2005, with 71 offerings valued at $25.6 billion, according to Dealogic. The Nasdaq came in fifth, with 139 offerings valued at $14.1 billion. Together, they handled about 25% of the value of all the world’s new listings. And the current market is favorable for IPOs, according to more than 80% of executives recently surveyed by corporate law firm Nixon Peabody. Though 75% of them believe SOX is too restrictive, less than 20% expect IPO deals to decline going forward. Nixon Peabody’s survey also notes that while the AIM remains popular, it has certain drawbacks for small U.S.-based companies attempting to plan for future growth. Only 5% of the surveyed companies had chosen to list there, compared with 32% on the Nasdaq.
The U.S. IPO market had been off to a solid start this year. From January to July 2007, 166 stocks, with a market value of $37.15 billion, held IPOs, up from 132 during the same period a year ago, according to Dealogic. But the IPO market has not been immune from the steep losses on Wall Street over the past few weeks. ”IPOs still are considered a luxury,” David Menlow, president of IPOFinancial.com told Businessweek. ”If investors are worried about their core positions, they’re not going to venture out into the IPO market and be aggressive.” As a result, underwriters are cutting their offering prices.
Fewer firms may file for initial public offerings as the year goes on, limiting the IPO market to high-quality offerings. PricewaterhouseCoopers reports that 64 IPOs raised $12.1 billion during the first quarter alone. That’s also up slightly from the same period a year ago in which $11.9 billion was raised from 56 IPOs. More broadly however, a Thomson Financial survey of all U.S. IPO activity shows a trend of fewer but higher-quality deals. The 189 IPOs last year raised nearly $43 billion. In comparison, 558 deals in 1997 raised only $41.4 billion.
Nevertheless, though the U.S. IPO market remains strong, after 100 years as the financial capital of the world, New York now faces some competition overseas. And high quality candidates seeking investment banking opportunities stand to benefit from the trend. A.E. Feldman says banks are seeking experienced investment bankers with solid track records in leading IPOs.
