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Wall Street Beat: Twitter grabs spotlight, but tech IPOs were already hot
- — 13 September, 2013 20:55
Even before Twitter's initial public offering announcement grabbed the spotlight Thursday, the market for tech IPOs had been heating up thanks to a general rise in stocks.
There were 12 tech IPOs in the U.S. in the second quarter, twice as many as in the first quarter, according to the latest PwC Global Technology IPO Review, released Thursday. Second quarter IPOs were also up 50 percent year over year, in terms of the number of deals, PwC said.
"The increasing risk appetite of investors, followed by a rising equity market, led to a surge in IPO activity in Q2 2013," according to the report.
With the European economy stalling and an absence of IPOs in China, the U.S. led the world in tech IPOs in the second quarter, with two-thirds of the global total.
"With the US market showing greater strength than others around the world, it's not surprising that nine of the top ten deals traded on either the NYSE or NASDAQ," PwC said.
In terms of deal value, U.S. tech IPOs in the second quarter raised US$2.2 billion, a 139 percent increase from the first quarter but an 87 percent decline year over year, including the Facebook IPO of $16 billion in 2012, according to PcW. Taking the Facebook IPO out of the equation, IPO proceeds raised were up 59 percent year-over-year.
Other experts agree that a strong stock market was the key factor in the rise in the number of IPOs during the second quarter.
"To have a strong IPO market you need two things -- you have to have the general market at your back and your sector has to be performing better than others," said John Fitzgibbon, who runs the IPOScoop website.
Tech companies have at least one of those elements, a strong general market, obviously going for them. The Dow Jones Industrial Average is up 16.76 percent for the year, the Standard and Poor's 500 is up 18 percent for the year and the tech-heavy Nasdaq is up 23.07 percent of the year.
The Nasdaq Computer Index, which excludes telecom companies, is up 14.03 percent for the year -- not bad, but not as strong as other sectors. However, computer stocks have been gaining ground since the first quarter. At the end of the first quarter, the Nasdaq Computer index was up less the 6 percent for the year. So clearly, while computer stock may still have a way to go before catching up to some other sectors this year, they are gaining momentum.
Within the tech sector, software, Internet and services companies are the most likely IPO candidates, PwC noted. In the second quarter, software companies had six IPOs with total proceeds of $708 million, while Internet software and services companies recorded five IPOs that raised $606 million.
"Cloud-oriented tech is the in thing right now," agreed IPOScoop's Fitzgibbon.
The success of some of the second quarter IPOs may help continue to fuel the tech IPO market through the end of the year.
For example, analytics software vendor Tableau and cloud-based marketing automation vendor Marketo both announced IPOs during the first week of the second quarter.
Marketo closed Friday at $34.42, up from $23.10 on its first day of trading, and Tableau closed at $72.42, up from $50.75.
As for Twitter, it's anyone's guess as to when it will actually launch its IPO. The company announced its intentions in a Tweet, and there's only so much information you can deliver in less than 140 characters.
The company took advantage of the Jump-Start Our Business Startups, or JOBS Act, which went into force last year and lets companies with less than $1 billion in revenue hand over their S-1 filing to the Securities and Exchange Commission confidentially.
This means companies can file, make amendments and then reveal their business strategy and financial data to the public when company officials feel the time is just right. It's likely to increase the number of IPOs because it gives companies more control over the whole IPO process, Fitzgibbon said.
And, even though some investors may grumble that they have less time to evaluate a company's financials, the JOBS Act may benefit the public, Fitzgibbon argues.
"It's much like a one-day sale at a retailer; the price ends up being discounted" Fitzgibbon said, arguing that as a general rule, the less time there is between an announcement of a sale and the actual sale, the cheaper the sale price will end up being.
Twitter aside, ongoing strength in the U.S. market appears to set the stage for more tech IPOs this year
"Continued strength in the US capital markets, despite signals by the Federal Reserve that stimulus efforts would begin to slow, supported reasonable valuations and solid post-offering performance for US technology IPOs," said Tom Archer, PwC US technology industry leader, in the report. "In addition, a return to early-stage investments by venture capital investors points to improving confidence in profitable exits and a robust pipeline of future technology offerings."