The IPO market in the U.S. is off to a slow start in 2016; according to Renaissance Capital, only eight offerings have priced so far this year, through March 29, 2016. The IPO slowdown actually began in the second half of 2015, when market volatility and stock price declines encouraged some prospective IPO companies to stay on the sidelines rather than complete their planned offering. But while the number of IPOs in 2015 declined compared to the immediately preceding years, there still were a number of interesting IPO trends during 2015, as detailed in a March 24, 2016 report from the Wilmer Hale law firm entitled “2016 IPO Report” (here). As discussed below, the report describes a number of the important characteristics of the 2015 IPOs. The report also contains some interesting discussion of the attributes of successful IPOs and an overview of the potential liabilities of directors of IPO companies.
The Number of IPOs: According to the report, there were 152 IPOs completed in the U.S. in 2015, compared to the 244 completed in 2014, representing a decline of about 37%. (The law firm’s IPO tally differs slightly from that of Renaissance Capital, but the numbers are directionally consistent). Though the numbers were down, the numbers were “largely in line with the annual average of 157 IPOs that prevailed over the ten-year period preceding 2014.” The decline in 2015 compared to the year before was largely a factor of the drop off in the number of IPOs in the year’s second half, due to heightened volatility and broad market declines.
Offering Proceeds: The gross proceeds from the 2015 offerings were $25.17 billion, the third lowest annual total over the past decade, and almost two-thirds below the $74.39 billion raised in 2014. The 2015 total was almost one-quarter less than the average annual gross proceeds of $32.92 billion over the ten-year period preceding 2014. This decline is due in part to the absence during 2015 of large IPOs. There was only one billion-dollar IPO in 2015, compared to nine in 2014 and six in 2013.
Median IPO Size: The median IPO offering size in 2015 was $91.7 million, down from $96 million in 2014 and $107.4 million in 2013. The 2015 figure represents the second-lowest annual median offering size since 2000.
Mix of IPO Companies and the Prevalence of Life Sciences Companies: The decline in gross proceeds and in the median offering size is due at least in part to the high proportion of life sciences companies among the 2015 IPOs. Life sciences companies typically have smaller offerings. Life sciences companies accounted for 47% of all U.S. IPOs in 2015, up from 40% in 2014 and 28% in 2013. Emerging Growth Companies (EGC) accounted for all but ten of the 2015 IPOs, representing 93% of the total, compared to 85% of all 2014 IPOs and 82% in 2013.
First Day Performance: The average 2015 IPO produced a first-day gain of 16% (compared to 14% in 2014), marking the second-highest figure since 2000 (trailing only the average gain for 2013). There were five “moonshot” IPOs in 2015 (that is, companies that doubled in price on their opening day), down from seven in 2014. In 2015, 26% of all IPOs were “broken” (with stock prices at the close of the first day of trading below the offering price), about the same as the 27% in 2014 but slightly higher than the 25% during the five-year period preceding 2014. Only six of the 39 “broken” IPOs in 2015 recovered their first-day loss by year end.
Year-End Performance: By year end, the average 2015 IPO company had seen is first day gain entirely erased. At least 28% of all 2015 IPO companies were trading at least 20% above their offering price at year end, 55% were trading below their offering price and 68% were trading below their first day closing price. All but one of the top ten performers at year end was a life sciences company.
Revenue and Profitability: The median annual revenue of 2015 IPO companies was $37.8 million, 45% less than 2014 figure of $68.2 million and 65% below the $108.8 million figure for the five-year period preceding 2014. The percentage of profitable IPO companies declined to 30% in 2015 from 36% in 2014 and 46% in 2013. The prevalence of life sciences IPO companies affected median annual revenue and profitability statistics in 2015. For example, only 6% of life sciences IPO companies were profitable in 2015, compared to 53% for all other companies.
Foreign Issuer IPOs: There were fewer IPOs involving foreign issuers in 2015 compared to 2014. There were 35 IPOs involving foreign issuers in 2015 (representing 23% of all IPOs), down from 60 in 2014 (25% of the market), a year-over-year decline of 42%. Among foreign issuers, there were five Chinese companies, and four each from Canada, Israel, and the United Kingdom. The average foreign issuer IPO company ended the year trading 3% below its offering price.
Profile of Successful IPO Companies: The most successful IPO companies have a number of attributes in common, although some of the factors can vary according to industry. For example, many life sciences companies have smaller revenue and are not profitable, but may still have successful IPOs. Allowing for this kind of variability, the most successful IPOs share a number of common features, including
- Experienced and talented management with high integrity, a vision for the future, energy to withstand the IPO process and a proved ability to execute;
- A superior technology, product, or service in a large and growing market;
- Substantial revenue, at least $50 million to $75 million annually;
- Consistent and strong revenue growth, 25% or more annually;
- A track record to earnings and an ability to enhance margins;
- A potential market capitalization of from $200 million to $250 million;
In addition, in order to be ready for public ownership, prospective IPO companies must be prepared from an accounting and corporate governance standpoint, and must have financial and disclosure controls and procedures in place. In addition, the company must have appropriate arrangements for external communication and for legal and regulatory compliance.
Liability Considerations for Directors and Officers of Public Companies: IPO Companies as well as their directors and offices may be liable if the company’s registration statement is materially misleading. Directors and officers, however, unlike the company itself have an important defense – the so-called “due diligence defense” – which is available if the individuals are able to show that they had reasonable grounds to believe and did believe in the truth of the statements in the registration statement. Directors and officers are also entitled to indemnification under the company’s corporate charter and corporate bylaws if they have met the applicable standard of conduct. Many IPO companies also enter into separate indemnification agreements with each director and officer.
D&O Insurance for IPO Companies: An IPO company will also have to obtain D&O insurance built to address the public company exposures the company will be taking on as a result of the IPO. A company going public “should procure adequate D&O insurance before the pricing of the IPO.” As the report notes, significant time may be required to assess the company’s needs, understand the alternatives, choose the carrier and coverage, review the policy, and complete the related arrangements. This process should begin well in advance of the anticipated offering date.