Wild-eyed IPO puffery has been replaced by more sober transactions that involve companies with real business models and revenue generation.
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Consider tech firm Aruba Networks Inc., a provider of secure access to data, voice and video across wireless and wireline networks. It made its debut as a public company last month with a 29 percent first-day rise. While not yet profitable, revenues are rising from an impressive list of paying clients that includes Google Inc.
"The sizzle of an IPO may be great, but make sure it is a steak and not just a dead cow," said John Fitzgibbon Jr., founder of IPO Scoop.com in Edison, N.J. "It could be a marvelous opportunity to invest in the future, but you must investigate before investing."
Leaders in first-day returns this year have been hedge fund Fortress Investment Group, with a 68 percent gain, health-care firm Accuray Inc., with 58 percent, and aerospace company AeroVironment Inc., with 41 percent.
Private-equity firm Blackstone Group's blockbuster announcement of what would be the sixth-largest IPO ever in the U.S. in terms of dollars raised--a $4 billion offering--indicates the market potential.
Others filing for IPOs have been food retailer Harry & David Holdings; movie theater operator Cinemark; and Vanguard Car Rental Group, owner of Alamo and National.
Yet this market can't avoid a few setbacks.
"Vonage Holdings Corp. is the poster stock for what not to do for an IPO, a train wreck that's still in motion," said David Menlow, president of IPOfinancial.com in Millburn, N.J., regarding the telecom firm whose stock quickly fell. "The harsh reality is that, since any Goliaths in the market could give VoIP [voice over Internet protocol] away for free and not impair their operating expenses, how could Vonage possibly compete with that?"
In the U.S., 67 IPOs valued at $11.9 billion took place in the first quarter, a modest increase over 56 worth $10.7 billion in the first quarter of last year, according to Dealogic research.
"It's a buyer's market in IPOs with standard valuation metrics being applied, which definitely wasn't the case from 1999 through 2001," said Francis Gaskins, president of IPOdesktop.com in Los Angeles. "You don't have the artificial demand being created as before."
MasterCard Inc. and Hertz Global Holdings Inc., offered as IPOs last year, are attractive stocks of well-known companies with excellent franchises that have continued to do well.
More and more cautious investors are waiting until an IPO is actually trading and can be observed more rationally before they buy. In reality, most investors will only be able to participate in an IPO that way.
"The average investor doesn't always have a full-service brokerage account, which is what you need to get into an IPO," said Linda Killian, portfolio manager of IPO Plus Aftermarket Fund in Greenwich, Conn. "For example, if you are a customer of Merrill Lynch and are reasonably active, you are likely to get an opportunity for some, but not all, the Merrill Lynch IPOs."
Her fund offers investors another entry into this market. IPO Plus Aftermarket, a no-load (no sales charge) fund that requires a $5,000 minimum initial investment, has a three-year annualized return of 10 percent and a five-year annualized return of 12 percent. It invests in a diversified portfolio of IPO stocks at the time of the offering and in their subsequent aftermarket trading.
Largest holdings are utility ITC Holdings Corp., telecom firm NeuStar Inc., restauranteur Tim Hortons Inc., health-care company Brookdale Senior Living Inc. and financial services firm Intercontinental Exchange Inc.
"The underpinning of the IPO market is still the institutional investor, since you don't bring a deal public until you have enough institutions to buy the deal," said Killian, who has run her fund for a decade.
The wheeler-dealers have declined, another characteristic of sobriety. In the 1990s nearly 100 different investment banking firms were involved in bringing IPO deals to market. This year just 26 have been involved, 17 of those offering only one or two deals.
Menlow predicts a docile IPO market, with the premiums being paid under control for the rest of 2007. Investors fortunate to get in on an IPO must carefully go through a checklist that includes how the company will use IPO proceeds, risks involved, the firm's financials, comparable stocks, corporate strategy and qualifications of management.
"We are a little concerned about the increase in private equity-sponsored offerings in the IPO market because the consensus is that insiders there are trying to monetize their investments so they can cash out," Menlow said.
He is also looking for resurgence in energy stocks because there is "no way to escape" the fundamentals of the energy sector.
Among the New York Stock Exchange and the American and Nasdaq stock exchanges, "you have 7,000 to 8,000 companies, most of which came to life via the IPO route," Fitzgibbon said. "Some of the more notable are Ford, Microsoft and Apple, indication that America's future comes out of the IPO market."
Andrew Leckey is a Tribune Media Services columnist. E-mail him at firstname.lastname@example.org