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What the cancellation of the Travelport and the New Look IPOs did is create a huge buzz around whether the market is right for IPOs or not. Some of the reasons that have been highlighted for the market not being right are:
- Falling valuations in general – perhaps thanks to the negative impact of the Greek crisis and the negative financial data coming out of UK. This is in no way helped by the election uncertainty
- The lack of demand from fund managers for highly levered private equity exits. The general feeling is why should they be helping PE firms make the quick buck and invest in firms where the proceeds will go towards deleveraging rather than driving growth
- An increase in corporate M&As and buyouts rather than IPOs supported by the gradual opening up of the leverage markets
Let’s look at these beginning with valuations.
After the doomsday predictions of March 2009, in just a few months the market acceptance for new stock issues started rising. Riding the wave of the rising stock market, a host of companies began looking at stock issues as a means of raising fresh capital.
IXIC - NASDAQ; GSPS - S&P
A number of banks issued new stock which, interestingly enough saw an exceptionally strong pick-up. Goldman in Q2 2009 sold close to $5 billion of its shares to pay off the government cash fusion. This was quickly followed by a common stock offering of $13.5 billion by Bank of America and $4 billion by Morgan Stanley. Closer to home we had Lloyds and RBS. In fact, the FTSE 100 is currently trading at a P/E ratio of 12.66x compared to 14.32x in 2006, just 12% of those highs (Courtesy: Telegraph)
But I digress - our focus is tech valuations. Regent Partners has done an interesting study of European tech valuations in 2009.
P/E multiples showed improvement rising from lows of ~10x in Q2 2009 to >13x by Q4 ‘09. P/S rose from 0.65x to almost 0.8x by Q4 ’09. (The numbers include partial earn-outs and are based on historic performance). But then the market performance started dipping as shown by the Nasdaq performance above and the FTSE Techmark below and that is the comparable we use to guage the potentials of IPOs.
Courtesy: Bloomberg, Regent Partners
However, if you actually look at the numbers the dip is marginal. Both are off their highs by about 4%. The FTSE Techmark (ALL) is almost at its 2007 highs. So, What's the noise about? Is the paranoia more to do with volatility rather than an actual drop in valuations?
.......to be continued.....
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