New Wave of Offerings Tests Investor Demand
By KATE BERRY
Staff Reporter
After a three-year slump, the IPO market has finally awoken from its slumber, and a handful of Los Angeles firms are lining up to tap the public markets. The question is whether investor demand can keep up with the heavy backlog of new issues.
While some big names are attracting attention, including Google Inc., Domino’s Pizza Inc. and Morningstar Inc., there is growing concern among IPO watchers that the market will be unable to absorb the many new issues. Some may be shelved; others could be priced lower than their original range, as Real estate giant CB Richard Ellis Group Inc. discovered last week.
Its 24 million share offering got priced at $19 per share, below the expected $20 to $22 range. On its first day of trading, the stock fell 55 cents to close at $18.45. The Los Angeles-based commercial real estate broker remains saddled with debt from a leverage buyout in 2001 and reported a loss of $34.7 million last year on $1.63 billion in revenue.
“One of the reasons there’s such a flurry of activity is that so many companies have been shut out for so long,” said David Posnick, managing director of the Los Angeles office of investment bank CS First Boston.
Among other local companies that have filed for IPOs: Torrance-based eCost.com Inc.; MannKind Corp. in Valencia; Los Angeles-based PeopleSupport Inc. and Thomas Properties Group Inc.; and Interactive Health Inc. of Long Beach.
By comparison, last year there were only two local IPOs of note, Molina Healthcare Inc. and Maguire Properties Inc.
Nationally, IPO volume is on track this year to surpass the volume of the previous four years and to return to the levels of the mid-1990s.
So far this year, 73 companies have raised $14 billion, compared with just 10 IPOs that raised less than $1 billion in the first half of 2003, according to Thomson Financial. Roughly 170 companies have filed registration statements so far this year.
“Companies are seeing this as an opportunity to raise cash because the past three years were years when the market failed to crack even 100 deals per year,” said Richard Peterson, chief market strategist at Thomson Financial.
Biotech troubles
One of the trouble spots on the horizon is biotech. About one-third of all IPOs that have come to market this year have been priced below the low end of their filing range, and biotech has made up a disproportionate amount of the IPO pool about one-third of all issues.
Both issuers and underwriters have had to make adjustments to get the deals done, Peterson said. In some cases, companies that shelved plans to go public are making a second stab at it, hoping conditions have improved.
MannKind, the brainchild of biotech mogul Alfred Mann, its chief executive, wants to raise $86.2 million by August through underwriter UBS Investment Bank. MannKind is close to a final phase of clinical trials on an inhaled form of insulin for Type II diabetics.
While biotech remains one of the worst-performing markets over the past decade, Todd Jadwin, senior managing director at Alexander Dunham Securities, said investors are willing to endure some volatility if they believe the stock is a strong performer.
“Now that we’re several years out of the peak and the market crash, the higher the chance that the market is going to show some reasonable returns,” he said.
Another popular trend is the outsourcing of business processes overseas. PeopleSupport wants to capitalize by providing sales and technical support from facilities in the Philippines. The company has 29 big clients in the U.S., including Expedia Inc., Network Solutions and Earthlink Inc., which accounted for nearly 90 percent of its $30 million in revenues last year. PeopleSupport, whose underwriter is SG Cowen & Co., wants to raise $86.2 million this summer.
Challenges for small companies
One of the largest upcoming issuances will be from Los Angeles-based Thomas Properties Group Inc., owner and operator of office buildings in Philadelphia and Southern California. The company, well known in the downtown office market, is looking to raise $250 million.
The company’s chairman, president and chief executive, Jim Thomas, is a former co-managing partner of Maguire Thomas Partners, a predecessor to Maguire Properties.
Unlike Maguire, Thomas Properties opted not to file as a real estate investment trust, the common public structure for office developers.
Friedman Billings Ramsey and UBS Investment Bank are the underwriters for Thomas Properties.
One of the few consumer product companies looking to go public is Interactive Health Inc., in Long Beach, a maker of robotic massage chairs that sell through Sharper Image Corp. The company, whose underwriter is Banc of America Securities, has not specified how much money it’s looking to raise in a public offering, expected some time this summer.
Small-cap companies have had difficulty attracting coverage from Wall Street analysts. One company expected to face challenges is eCost.com, an online retailer of used computers and other consumer products that is a spin-off of PC Mall Inc. After the offering, PC Mall is expected to retain more than 50 percent ownership of eCost.com. eCost’s offering is underwritten by William Blair & Co.
Coming Out: Upcoming local issues.
Thomas Properties Group Inc.
Headquarters: Los Angeles
Industry: Commercial real estate
2003 Revenues: $67.1 million
2003 Net Loss: ($1.3 million)
IPO Size: $250 million
Filing Date: April 16
Major Shareholders: Chairman and Chief
Executive James A. Thomas
MannKind Corp.
Headquarters: Valencia
Industry: Biotechnology
2003 Revenues: $0
2003 Net Loss: ($65.9 million)
IPO Size: $86.2 million
Filing Date: April 30
Major Shareholders: Chairman and Chief
Executive Alfred E. Mann
PeopleSupport Inc.
Headquarters: Los Angeles
Industry: Offshore outsourcing
2003 Revenues: $30 million
2003 Net Income: $8 million
IPO Size: $86.2 million
Filing Date: May 10
Major Shareholders: Rustic Canyon Partners, Clearstone Venture Partners
