IPO funk set to go on after more flops

By Phil Wahba

NEW YORK, Aug 1 (Reuters) - Any hopes that two Chinese companies' market debuts this week would revive a moribund IPO market were dashed when both fell flat, indicating that companies may face reluctant investors for the foreseeable future.

China Distance Education Holdings Ltd (DL.P: Quote, Profile, Research, Stock Buzz), a provider of online test preparation services, raised $61 million, down from an initially targeted $88 million. Just hours before its IPO on Tuesday, it lowered its price range. Despite that effort, its shares have dropped 9 percent.

Meanwhile, China Mass Media International Advertising Corp (CMM.N: Quote, Profile, Research, Stock Buzz), which was set to begin trading Friday, has had to postpone its pricing and trading until next week, and some wondered whether it could be postponed indefinitely.

According to an amended regulatory filing issued Friday, the company now expects the IPO to generate $52.7 million, down from an earlier estimate of $89 million.

"Both these deals in a good market environment would have done well," said Scott Sweet, a senior managing partner at investment advisory firm IPO Boutique. "The allure of China is no longer there now."

But the seemingly endless string of disappointing IPOs is not limited to Chinese companies. Last week's debut by New Hampshire-based GT Solar International Inc (SOLR.O: Quote, Profile, Research, Stock Buzz), which was oversubscribed, also turned investors off. The solar energy equipment maker's shares have fallen 28 percent since the IPO.

"It's a general market situation," said Sal Morreale, who tracks IPOs at Cantor Fitzgerald. "Once you see a deal like GT Solar go bad, it casts a dark cloud over the next round of deals."

Analysts said GT Solar and the two Chinese companies are solid with attractive growth prospects. But with the recent spate of disappointing IPOs and turbulent markets, investors are fussier than ever and will react

more strongly to any whiff of trouble, especially with younger companies.

"In a market as easily spooked as a horse, I just don't see anything do well unless it's a solid story," said Linda Killian, a principal at Greenwich, Connecticut-based advisory firm Renaissance Capital. "When you get bad news with a company with no track record, investors will say 'sayonara' -- they'll walk away, they won't investigate."

GT Solar was unlucky because a day after its IPO, a major client said it had signed a contract with a competitor, Killian said. In a better climate, investors might have shrugged off the news, she said.

HOPE SPRINGS ETERNAL

Next week, two more companies will try to beat the odds.

Rackspace Hosting Inc, a San Antonio-based web hosting company, hopes to raise $210 million, according to data tracker Dealogic, while Lexington, Kentucky-based coal producer Rhino Resources Inc is aiming for $170 million.

Analysts say they could succeed because both are growth companies in sectors that haven't seen companies go public in a long time. There hasn't been a coal-related IPO since 2006, when Penn Virginia GP Holdings LP (PVG.N: Quote, Profile, Research, Stock Buzz) went public, according to Thomson Reuters data.

Sweet said the last company similar to Rackspace to try its hand was Go Daddy Group Inc, which withdrew its IPO in 2006. Rackspace has a longer track record and a large, diverse clientele that work in its favor, he said.

"Both are high quality IPOs, the best in some time," said Sweet.

Killian thinks a positive reception for the deals could help sentiment for other offerings.

That remains an uphill battle in a bear market. Sweet believes that equity markets' steep fall on Thursday contributed to the delay in pricing the China Mass Media IPO.

TOUGH TIMES, TOUGHER STANDARDS

Investors' standards are now more exacting than ever, analysts said.

"People are looking for recurring revenue, high gross margins and want a company to have been profitable in the past three to four quarters," said analyst Francis Gaskins of IPO Desktop.

And, he added, investors want to see IPO proceeds used for growth, rather than paying for owner buyouts or paying off debt. GT Solar's IPO proceeds went to existing shareholders, rather than the company.

How a deal is handled by underwriters can also make all the difference in how it's received by the market.

"It needs to be priced right and placed in the hands of institutions or retail clients who won't just flip them and sell them off quickly, even on the first day," said Sweet.

Still, no matter the quality of companies trying to go public, or the underwriters' approach, the IPO market will remain temperamental until the overall economy and securities markets recover, Killian said.

"We need the banking crisis not to have new shoes dropping," she said. "If we've worked our way through our mortgage blues by the fall, then maybe."