Analysis: After US IPO stumbles, companies under pressure to offer bargains

Klaviyo

19/10/2023 11:00

By Echo Wang
       NEW YORK, Oct 19 (Reuters) - Companies pursuing U.S.
initial public offerings (IPOs) after a string of lackluster
stock market debuts are receiving advice from investment bankers
to lower their valuation expectations.
    The IPO market saw a flurry of big listings in the last five
weeks, emerging from an arid spell that lasted most of 2022 and
2023 and was driven by stock market volatility amid rising
interest rates.
    There were four major IPOs, and three of them disappointed
investors. Shares of German sandal-maker Birkenstock  BIRK.N ,
grocery delivery app Instacart  CART.O  and chip designer Arm
Holdings  ARM.O  dropped below their IPO prices in the days that
followed their debuts, though Arm's shares are now slightly over
that price. 
    Only the shares of marketing automation platform Klaviyo Inc
 KVYO.N  have consistently traded over their IPO price, ending
trading on Wednesday 2% over it. 
    Nine bankers and lawyers interviewed by Reuters said that
high interest rates have made investors more risk-averse. They
are advising companies to seek more conservative valuations in
their IPOs so they can entice stock market investors with
bargains.
    "(Companies) understand that if you come to the IPO market
in the near term, you're going to suffer some of the hangover
from the performance of these recent high-profile transactions,"
said David Levin, co-head of equity capital markets at
Guggenheim Securities.
    The four big IPOs were a shot in the arm to U.S. listing
volumes. Total proceeds from IPOs on U.S. exchanges totaled
$19.4 billion from the start of 2023 to the end of last week, a
two-year high that nearly tripled the haul over the same period
last year, according to LSEG.
    Those proceeds are a fraction of the haul during the same
period from 2019-2021, however, when proceeds ranged from $43.3
billion to $119.2 billion.
 
    The overall performance of IPOs this year has been
lackluster. More than three-quarters of companies that went
public, excluding blank-check acquisition firms, are trading
below their IPO price, according to Renaissance Capital. 
    Healthcare payments tech firm Waystar, insurance group
Hamilton and oil-and-gas helicopter provider PHI Group will have
to decide in the coming days whether they will proceed with
their IPOs and how aggressively they will price them.
    The companies have published their IPO registration
statements so they can be ready to launch their stock market
debuts in the next few days, ahead of a potential U.S.
government shutdown next month that would freeze listings
because it would cut funding to the financial regulators
overseeing them. It remains unclear whether the shutdown will
happen, as U.S. lawmakers struggle to elect a speaker in the
House of Representatives.
        Representatives from Waystar and PHI did not immediately
respond to requests for comments. Hamilton declined to comment.
  
           
  
        VALUATION ADJUSTMENT
    Going by the performance of Birkenstock's listing, some IPO
hopefuls may have to significantly adjust their valuation
expectations.
    Birkenstock was seeking a valuation equivalent to about 27
times trailing 12-month earnings before interest, taxes,
depreciation and amortization at the top of its indicated IPO
range. It ended trading on Wednesday worth only about 17 times
that.
   "When the stock opens more than 10% below where the IPO was
priced, it is a clear sign the deal outpriced its demand,"
capital markets consultant and Wharton School lecturer David
Erickson said of Birkenstock's IPO.
    For some companies, the hostile IPO environment may prove
too much. Rubrik, the cybersecurity software company backed by
Microsoft Corp  MSFT.O , was planning to launch its IPO investor
roadshow as early as this month had the market been more
receptive, a person familiar with the matter said. It is now
holding back.
   A Rubrik spokesperson declined to comment. 
  "We continue to see demand for high quality companies, but
investors remain cautious and sensitive to valuations," said
Robert Stowe, head of Americas equity capital markets at
Barclays Plc  BARC.L .

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 (Reporting by Echo Wang in New York
Additional reporting by Deborah Sophia in Bengaluru
Editing by Greg Roumeliotis and Rod Nickel)
 ((Greg.Roumeliotis@thomsonreuters.com; +1 646 223 6022; Reuters
Messaging: greg.roumeliotis.thomsonreuters.com@reuters.net))