More than half of the U.S.-based companies making their domestic stock-market debuts this year are trading below their offer price, an ominous backdrop for any companies hoping to come public.
For any investor who bought—and held—these so-called underwater stocks in their portfolios over the course of the year, it is a painful reminder that even deals that did well their first day in the spotlight can crater later.
Among the companies trading below their IPO prices are Internet radio firm Pandora Media Inc., which popped 8.9% on its first day of trading during its debut in June, and physicians' hand-held software maker Epocrates Inc., which gained 37% in its first day in February.
The poor year-to-date performance among U.S.-based companies—so far this year, 63% of the 76 new listings are underwater, according to data tracker Dealogic—can be blamed primarily on the overall stock market, which itself has been sinking for the past two months. When stocks in general aren't doing well, IPOs suffer in turn and companies reconsider the listing plans.
Standard & Poor's 500 since early July that is weighing on IPOs, but also the stomach-churning ups and downs that have racked the market in recent weeks.
"It's not so much the level of the market but this kind of volatility that makes it difficult to price" new issues, said Tim Curry, a lawyer at Jones Day who works on technology-company IPOs in Silicon Valley.
Case in point: Earlier this month Groupon decided to cancel a roadshow it had planned and put its IPO on temporary hold because of stock-market volatility. It is reassessing its timing on a week-by-week basis,
"Until volatility settles down, it's going to be a while before the IPO market comes back in a meaningful way. I think the IPO market will be very selective, at best, and we're advising most clients to wait at least until" the Federal Reserve meeting Sept. 20-21, said Brian Reilly, head of U.S. equity capital markets at Barclays PLC.
Dealogic, which tracks stock and bond deals, says the current IPO backlog of 144 deals valued at $28.3 billion is the highest year-to-date number of deals since 2007.
The IPO market is seen as important to the economy because public stock offerings are a key way growing companies can raise large sums of capital that can be spent on advertising, new offices, new employees and other expenses.
And yet the biggest hindrance to the IPO market picking up may be the economy itself.
Sanjay Unni, who leads the securities practice at Berkeley Research Group, said the biggest issues weighing on stock prices and the ability to launch IPOs appear to be "larger macro issues that will determine how profitable companies will be once they float."
"Much of the movement on the downside has been, and continues to be, unanswered systemic risks in the global economy," such as Greece's sovereign debt crisis and the direction of the U.S. economy, Mr. Unni said. "Until those issues are resolved, we won't see a recovery in IPOs."
However, there is a bright spot for new issuers: Though the majority are underwater, the performance to date for IPOs is better than stocks in general. IPOs that came out in 2011 are down 6.5% on average from pricing as of the close Tuesday. The IPO stocks collectively performed better than Standard & Poor's 500 index, adjusted for the time period each company was public. Exactly half of 2011 IPOs are trading below the respective S&P 500 performance.
Also, some of the best new stocks have managed to stay above their IPO prices, though they have declined from their first-day pops. Professional-networking site LinkedIn Corp., which gained 109% in its May debut, ended Tuesday above its $45 IPO price but below its first-day closing price of $94.25.
Some have even managed to push higher: real-estate site Zillow Inc., which popped 79% on its first day in July, closed Tuesday above both its IPO and its first-day close.
Still, the news that the bulk of listings so far this year are underwater follows a nearly empty August for IPOs in the U.S. as companies cautiously evaluate the environment for new stocks.
With only two IPOs completed amid a declining broader market in August—the slowest month since July 2009, according to Dealogic—issuers and investors alike are keenly attuned to economic concerns and their effect on major stock indexes.
Observers have said they believe issuers that were considering a late-September launch now are more likely to delay those deals until October and November, depending on market conditions.
"It's a challenging decision to make. What they hope to avoid is completing their roadshow and not pricing the deal," says Rick Kline, a partner in law firm Goodwin Procter's Silicon Valley office who specializes in IPOs and capital markets transactions.
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