Why the IPO “experts” are wrong

Those who study the history of financial markets learn one thing: When all the “experts” agree, they are wrong.

That’s the case with the naysayers who are looking at 2013 to be an even flatter year for Initial Public Offerings. 2012 was down from 2011 and the experts say the financial condition of the United States and the world have not improved enough to make the market pick up.

“Gau, Ritter, and Zhu [authors of a paper “Where Have All the IPOs Gone"] expect the JOBS Act and other regulatory stimulus efforts to have an inconsequential impact on IPO activity and think we are unlikely to see the number of deals return to the levels seen in decades past,” states a report in SeekingAlpha.com , an investment website.

What these men almost overlook is the Jumpstart Our Business Startups act. JOBS promises to cut through the red tape that hinders small businesses from going public to raise needed capital. The three authors do acknowledge the JOBS act, but they believe it will have no effect on the IPO market. These men are not accustomed to dealing with smaller businesses. Since their focus is on giant corporations, they are not able to see the small companies.JOBS was specifically created for the small businessman who flies under the radar of the world’s financial giants. The innovations they create, which previously had to be shopped to existing giant tech companies, can now be developed and marketed by the creator.ACCESS MATTERSWhile the US led the IPO market by a large margin in 2012, the decline will hold, Hazem Ben-Gacem told the Wall Street Journal in the article “U.S. Has Biggest Slice of Slower Deal Market.” Mr. Ben-Gacem is the head of European corporate investment for Investcorp, an investment firm with offices in London, New York and Bahrain. “The one advantage with slow IPO markets is that, typically, only the best companies come forward and give it a try. A successful IPO in current markets requires some good timing and a compelling story for investors.”

Again, as a financial firm, Investcorp has little experience in dealing with companies that employ 20, 10 or fewer people, the very kind of company JOBS targets.

Such small companies do not have the existing financial resources to “ante up” to the big tables for an IPO. They simply cannot afford to spend tens of thousands to possibly $1 million on lawyers. They are also not willing to let giant industrial investors buy the stock at a discount and turn around to sell it to the public at a substantial profit.

While good timing and a compelling story are very important, just getting access to investors is more important. You can have the best idea in the world and the timing be perfect, but if you can’t get capital, it’s not going to matter.

TECH TALK

The WSJ’s MarketWatch also talked to Deutsche Bank officials which said tech companies are going to be particularly slow. Chris Dieterich reports “Several factors have cast a pall over technology IPOs, Mr. [Ted] Tobiason said. For one, investors remain soured from a disappointing third-quarter earnings season, even as tech giants gear up to report fourth-quarter numbers in the weeks ahead. Weak earnings in the tech sector could act as a deterrent in the IPO market because potential issuers would likely get lower valuations. Tobiason is managing director of equity capital markets at Deutsche Bank.

The key words here are “tech giants.” Again the small picture is lost as the experts stand back to admire the expansive vista created by the giants. In the rush to talk about tech stocks, everyone seems to forget that tech advances come from one person or a small group of people, even from within a giant company.

Look at Apple, Google and other tech giants on the block. They all started small. Steve Jobs and Steve Wozniak almost didn’t manage to start Apple because of the problems at the time in attracting capital investors. Today, with the JOBS act and the IPO marketplace the way it is, they’d find raising money a much easier task.

Just as a single candle may not shed much light, a thousand, a million candles can light an opera house. Small business IPOs are going to be those million candles lighting up the financial world in 2013.
We firmly expect the upcoming IPOs of 2013 to turn the negative trend that has been impacting the small-cap IPO market for the past few years. The market needs to work to understand the JOBS Act and the positive impact it can have on the US equity market system.
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