IPO market set to awaken: rebounding capital markets and pent-up demand after several very lean years have set the stage for what could be a significant surge in new-offering activity.

Locked in a torpor for the better part of three years, the initial public offering (IPO) market may be doing a bit of a Rip Van Winkle--awakening after a prolonged slumber. Sunny news from the stock markets, corporate earnings and consumer confidence have seemingly sounded a wakeup call, though experts caution that any renewal of the explosive activity of the late 1990s isn't likely.

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After two very weak years, most observers expect substantial growth in both the number and volume of IPOs this year. One interesting source of fuel for the market is coming from China, where a few companies have gone public lately and risen sharply on anticipation of rollicking growth (see box). And expectations that Google, the Internet search engine giant, will go public in the spring has created a beehive of buzz, since it promises to be one of the largest issues in recent years.

"There's been quite a bit of activity, and there are a fairly substantial number of filings for the first quarter," says Tracy Lefteroff, a global managing partner at PricewaterhouseCoopers. "That doesn't suggest that all of them will get done. In many cases, people started drafting them in November and December, and the market's [increase since then] has done nothing but encourage them."

A chunk of last year's proceeds came in December, where 23 offerings--as many as the entire fourth quarter in 2002--totaling $5.72 billion were priced. Of that amount, $2.6 billion came from an offering by China Life Insurance, far and away the largest IPO in 2003. There were also several sizable real-estate investment-trust transactions that month.

Still, in comparison to the bubble years, when huge upswings often followed in the hours after the actual offerings, last fall's slate of IPOs have had "mixed" results, Lefteroff says, with some sliding below their initial offering prices. Yet, "there haven't been huge swings. It's not like people are leaving a lot of money on the table."

There is clear demand for "properly organized and well capitalized" companies, says Jonathan E. Cole, a Fort Lauderdale-based partner with the law firm of Edwards & Angell LLP, who says most recent IPOs have been trading up slightly, in the 5 percent-10 percent range. Most recent IPO issuers had revenues in excess of $50 million and were profitable, he notes, adding that's its still possible for a nascent biopharmaceutical firm to do an IPO "if they have a drug that addresses a substantial market."

The new IPO year opened unusually early, with a January 9 issue from K-Sea Transportation Partners LP that raised $86 million. It was the earliest in the calendar that a company raising at least $10 million had come to market in more than 20 years, and K-Sea's shares rose 15 percent in the first day of trading.

If the IPO market does surge this year, it will be rising in part from the proverbial ashes--globally. The market in continental Europe, for instance, has virtually collapsed since its peak in 1998. Data shows that in that year, Germany had 997 new issues and France 240; by 2002, those totals had plummeted to six and zero, respectively. (The German deals tended to be the smallest in the sampling.) Most of the capital was raised in their individual country markets, with fewer than one in ten issues being listed across borders.

While Europe still seems in something of a swoon, a release of some pent-up energy is expected in North America. "We have seen a turnaround," says Jeffrey Rubin, a partner in the New York office of Hogan & Hartson LLP and a member of the firm's Corporate, Securities and Finance Group. "After the tech bubble died, people became allergic to the markets, and we spent our 40 years in the desert. Investment banks are being very selective about what is being put out; they realize that their reputations depend on them. We're seeing more of a commitment to quality."

PwC's Lefteroff agrees that "one of good things that will happen is that with investment banking having downsized in the past couple of years, they have capacity constraints and they will be taking on only the best deals. We won't get an oversaturation of marginal companies." Another positive feature to the market, says Rubin, is the fact that "not only are we not dealing with inflated valuations, we're dealing with an undervalued set of expectations."

Asked if Sarbanes-Oxley rules for public companies could suppress new stock issues, Lefteroff replies, "Public markets do provide liquidity, and not just for the venture capitalists, but for the employees and the founders of those companies. That's how you get liquidity, and [recent rules] won't change the attractiveness of going public" for most people.

Cole, the Edwards & Angell attorney, does sound a cautionary note about 2004. "The IPO market is all about supply and demand," he says. "We're all waiting to see what's going to happen as the year progresses, and to see what the bond market does, and if money will be flooding into retirement accounts, which would lead to demand for new product."

Lefteroff believes that "pricing is likely to be more conservative" than it was a few years ago, though "there may be a bit of frenzy around Google." While a date for the Google IPO wasn't known in January, the company had chosen an investment banking consortium, led by Morgan Stanley and Goldman Sachs, to steer an IPO that could raise about $4 billion.

Where else might the activity blossom? Technology, says Lefteroff, noting that a number of companies are filing in the coming weeks and several are likely to come to market. That includes the beleaguered telecommunications space, he says, which has gotten a boost from Verizon's announcement that it planned to build a big wireless network.

Says Cole: "Longer term, you have to look to health care and life sciences, because that's where we're headed as a country. Right now, however, [activity is] pretty eclectic." Homeland security is drawing some attention from venture capitalists, he adds, especially in areas like encryption and databases that can verify identification.

Another focus for upcoming activity is spinoffs from larger financial services companies. That area was moribund in recent years, but now experts foresee a clutch of such deals. Assurant Inc., a U.S. insurance unit of Dutch giant Fortis NV, was planning to raise some $2 billion in an offering in early February, and another large expected spinoff is Genworth Financial, the life and mortgage unit being sold off by General Electric Co.; estimates have put that issue north of $3 billion.

Hank Erbe, head of global equity capital markets at Fox, Pitt Kelton in New York, told The Wall Street Journal that these carve-outs are being done for "capital management purposes. By monetizing non-core assets, companies can redeploy capital to faster-growing businesses and better position balance sheets generally."

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Like a cloud threatening to block the sun, the overhang of the bubble years remains on market-watchers' minds. "Most venture capital investors want to get back to more realistic business plan and valuation. They have a more sophisticated take on their exit strategies," says Rubin, which should keep the market from getting overheated.

"I have a decent confidence in the ability of the capital markets to rebound," he adds. "Everybody's been shell-shocked by the corporate scandals, but I've also been shocked by the question of whether the problems we've seen are the result of values or systemic failures. Those issues seem to be being addressed."

For anyone seeking confirmation that the market is turning, consider the pending IPO of Shinsei Bank Ltd., which was planning to list its shares in Tokyo in February. It was slated to be the first Japanese bank to go public in seven years, and is one of the few positive stories in the commercial banking sector there in recent memory.

Then again, consider the money behind Shinsei: Ripplewood Holdings LLC, a U.S. investment firm that is the bank's major shareholder. Western investors and venture capitalists know full well that recouping an investment means having an exit strategy--and acting on it when the time is ripe.

IPO Market's Big Chill

                       2000   2001   2002   2003

Number of Deals        406    83     70     68
Amt. Raised ($ bil.)    97    41     24     15

Source: Renaissance Capital, U.S. deals only

RELATED ARTICLE: The Chinese Connection

China and its immense labor and industrial markets are the source of constant speculation in the West, but China's promise has clearly brought some investment banks running.

In addition to the $2.6 billion offering from China Life Insurance in December, demand for shares of Ctrip.com International, the Chinese equivalent of Expedia.com, sparked strong interest in the U.S. From an offering price of $18 on December 8, the stock more than doubled at one point, and stood at $34 by late January. China Life itself rose as high as 86 percent above the offering price before falling back somewhat.

Market-watchers expect a boomlet in Chinese activity this year. From 1996-2002, American investment bankers had priced 28 IPOs from issuers based in mainland China, according to Red Herring. Of that group, 12 went public in the U.S. in 2000, making it the busiest year to date.