Shades of past slowdowns

March 31, 2008: 02:00 PM EST

Mar. 31, 2008 (Thomson Financial delivered by Newstex) --

NEW YORK (AP) - Trading like it's 1998? Or 2001? Some analysts contend that the current slowdown in the initial public offering market recalls the period surrounding a hedge-fund bailout in 1998, while others say it is similar to the downturn experienced during the last recession in 2001.

Though a recession has yet to be officially declared, Francis Gaskins, president of IPODesktop.com, sees similarities between the current IPO market and the one during the last economic recession, which was ignited by a bust in the technology industry.

'What's happened is the bottom has dropped out,' Gaskins said. 'The net result is the same, the causes are different.'

IPOs were scant for two years following the last recession in 2001. That year, a total of 83 IPOs generated proceeds of $40.8 billion, according to Renaissance Capital's IPOHome.com. That dwindled further in 2002 to 70 IPOs with total proceeds of $23.7 billion, and again in 2003 with 68 IPOs generating $15.2 billion in proceeds.

Year to date, there have been 22 IPOs, compared with 59 in the first quarter of last year.

But the market hasn't declined as far as it did after the last recession.

In the first quarter of 2002, only 16 deals were completed; in the 2003 first quarter, there were four.

Gaskins doesn't foresee a major uptick in IPOs for at least 18 months.

Kathy Smith, principal at Greenwich, Conn.-based Renaissance Capital, doesn't see as much of a parallel between the two periods.

'The problems we're having today are not excesses in the IPO market,' argued Smith. 'I don't think it will hit the long-term low levels we had in 2001, 2002, 2003, because in 2000 there was a bubble in the IPO segment. The bubble is with debt this time around.'

The havoc wrecking today's IPO market is much broader and tied more closely to the financial markets as a whole rather than the IPO market specifically, she said, not unlike the bear market that surrounded the bailout of hedge fund Long-Term Capital Management LP in 1998.

The problems in the current market have been spurred by an ongoing housing slump as irresponsible lending to customers with poor credit history led to an unprecedented increase in delinquencies and defaults on subprime mortgages. The resulting credit crisis has led to billions of dollars of losses for big banks and investment houses and the near-collapse of Bear Stearns Cos. (NYSE:BSC) , the country's fifth-largest investment bank.

'It's a mirror reflection to 1998,' agreed John Fitzgibbon, founder of IPOScoop.com. Then, as is the case today, the IPO market dried up, he said.

Leading up to the $3.5 billion government-led bailout of troubled hedge fund Long-Term Capital in September, the Standard & Poor's (NYSE:MHP) 500 index fell 22 percent from a high in July to a low of 923.32 in early October. IPOs also dwindled, falling from 36 in July to 16 in August, according to IPOHome.com.

A bright spot came in late September of that year, when online auction house eBay Inc. (NASDAQ:EBAY) -- the sole IPO that month -- raised $63 million after its IPO priced at $18 a share, the top of the expected price range, and soared more than 160 percent during its first day of trading.

Smith and Fitzgibbon compare the successful offering to credit-card giant Visa Inc.'s (NYSE:V) recent IPO, which raised nearly $18 billion and jumped 28 percent during its market debut March 19 after shares priced at $44 apiece, above the expected price range. Fitzgibbon said it took the IPO market about five to six weeks to recover after eBay. Only three IPOs were completed in October of 1998, compared with seven in November and 15 in December.

While no one can quite predict how long the current slowdown will last, analysts agree that once the market stabilizes, IPOs will shine.

'We do find that typically after a market washout, the returns on IPOs are usually pretty good because only the strong ones come out,' said Smith. 'Once the rest of the market stabilizes, you should see some very good returns.'