Credit Woes and IPOs
RedHerring.com, 10 August 2007, 14:37
by Ken Schachter

A vibrant IPO pipeline is brimming with new registrations, according to a report, but analysts say that turmoil in the credit markets could squeeze the flow of new deals.

A new Ernst & Young U.S. IPO Pipeline Report found that 108 companies had registered for initial public offerings worth $22.7 billion as of July 31.

But the IPO market could be challenged by a gathering storm in the credit markets that sent the Nasdaq Composite reeling to a loss of 2.16 percent Thursday followed by a .45 percent decline on Friday.

"These kinds of credit crunches always constrict the IPO window," said Francis Gaskins, president IPO Desktop.

The Ernst & Young report listed: three telecommunications companies seeking to raise a total of $325 million; four biotechnology companies, $2.4 billion; 19 pharmaceutical companies, $2.7 billion, and 20 technology companies, $3 billion. Of the filers, 12 of the pharmaceutical companies and 15 of the technology companies were backed by venture capital.

"The U.S. is attracting large IPOs from domestic and foreign companies that want the gold standard in IPO markets," Maria Pinelli, Americas director, strategic growth markets, Ernst & Young, said in a statement.

The biggest IPO on deck is a $2 billion deal filed by Cosan Ltd., a Brazilian sugarcane grower and processor.

In the second quarter, 59 U.S. IPOs raised $15.7 billion.

A credit crunch reduces marginal spending by consumers and businesses as credit card companies, banks and other lenders tighten terms.

"There’s less spending by consumers and businesses," Mr. Gaskins said. "Consumers are less inclined to try something new, which is what technology companies are based on. They’ll still buy toothpaste and soap, but anything discretionary will get a second look."

Still, the looming credit crunch has had scant effect on the IPO market over the last weeks, Mr. Gaskins said, though leveraged-buyout funds like Kohlberg Kravis Roberts, which filed for a $1.25 billion IPO might want to reconsider.

"KKR should postpone," he said. "They’re not going to be able to do the IPO in my opinion."

Regardless of how the credit crisis evolves, the IPO marketplace will take its annual seasonal break from mid-August to the week after Labor Day as Wall Street investment bankers go on vacation, Mr. Gaskins said.