A Look Inside the IPO Boom

The flood of initial public offerings that began last year continues to surge. This year's Q1 racked up a seven-year record high in IPO volume and proceeds.

Why the surge when the costs of public ownership and scrutiny of financial reports have escalated in the post Sarbanes-Oxley world? The primary reason for going public, according to "IPO Executive Insights 2007," a survey recently commissioned by giant law firm Nixon Peabody LLP, is increased access to capital. Billions of dollars have been raised for new issuers, as naysayers who feared that IPOs were increasingly unprofitable and risky were proven wrong.

In fact, this survey of CEOs and CFOs who led their companies through IPOs over the past three years shows that their companies are currently trading higher than their first-day close. And, contrary to fears that managements of companies seeking to go public were looking for exit strategies, over half of management and existing shareholders in transactions surveyed did not cash out their equity stakes.

According to another survey, Renaissance Capital's "2007 Semi-Annual IPO Review," the performance of IPOs over the past six months, on average, beat market averages. The star performers covered in this study came from the financial, energy, and technology sectors, which were the busiest sectors in terms of IPO activity. The worst performers were developmental-stage drug companies and several Chinese firms.

Still, experts believe that many companies continue to hold back on their IPO plans due to the burdens of Sarbanes compliance. Seventy-three percent of the executives surveyed by Nixon Peabody say that regulation is a major concern and feel that Sarbanes imposes an excessive degree of regulation and transparency on companies. "Some companies that are otherwise ready might want to wait and not issue an IPO because of the Section 404 burdens and other compliance costs. So a company's inability to sustain the compliance costs in terms of dollars, time, resources, and effort may make it less ready than it otherwise appears to be," says Irwin A. Kishner, head of the corporate law department at NYC-based Herrick, Feinstein.

But time is likely on the side of aspiring public companies. Despite recent stock market gulps, many market watchers think that favorable IPO conditions will continue over the next year and that investors' and analysts' appetites will remain hearty for companies that have a good track record for performance -- that is, if, according to David M. Traversi, an independent consultant and author who has managed over 40 IPOs, a company's financial performance is highly predictable and there is a very low probability that it will not meet the expectations of Wall Street research analysts and its new investors.

"And also if it has a critical mass market capitalization of at least $200 million," he adds. "Companies worth less than that are disdained by most institutional investors and, hence, never gain traction as a public company."