("March Shows IPO Market Getting Its Groove Back," published at 5:15 p.m. EDT, contained an incorrect ticker symbol for CafePress in the 15th paragraph. A corrected version follows.)
By Lynn Cowan
The U.S. IPO market appears to be getting its mojo back.
As March comes to a close with what could be the busiest week for initial public offerings since late 2007, it has become clear that both pricing and performance of new stocks has vastly improved compared with past months.
Increased investor interest in new stocks was on display Thursday, when mobile advertising service provider Millennial Media Inc. (MM) rose 92.3% on its first day of trading, the best pop since LinkedIn Corp. (>> Linkedin Corporation) rose 109% in May 2011. It did so after pricing at the high end of a range that was raised in response to strong investor demand.
Millennial's performance followed a similar eye-opening start from natural-foods company Annie's Inc. (BNNY) on Wednesday. Annie's also boosted its price range in response to investor demand, then priced a dollar above that raised level. It went on to gain 89.1% on its first day of trading.
Although the pair are the best performers so far this year, they come at the close of a month that has shown steadily improving pricing and trading conditions for the vast majority of IPOs.
Of the 16 deals that have launched so far this month, 11 have priced within or above their ranges, compared with eight of the 18 that launched in February.
Although first-day performance was generally positive in February, most IPOs rose only after their stock prices were slashed. In March, the best gains have come from stocks that priced above range.
What has happened over the course of the first quarter is investors started to see good returns from companies that cut their valuations in February, and that, in turn gave them more confidence about investing in new stocks, said Mary Ann Deignan, head of Americas equity capital markets at Bank of America Merrill Lynch.
"Ironically, in the aftermarket, most of the deals in February worked quite well. That's a necessary step toward putting some balance back into the IPO market. What we've seen in March is the balance is back, the pricing dynamic has improved, and there is still good aftermarket performance. Investors are now getting returns commensurate with their expectations," Deignan said.
Although the deals coming out now remain small--none this week was larger than $500 million--they aren't so tiny that they are getting artificially boosted by small floats.
Analysts said that there were good reasons that Annie's and Millennial did so well this week. While many investors are eagerly anticipating the biggest deal expected in the first half of the year--that of Facebook Inc.--there still appears to be appetite for small- and mid-sized companies that are lining up.
Annie's has a strong consumer brand recognition and has transcended its place amongst organic products at health food stores to attract shoppers at big-box retailers such as Target Inc. (TGT) and Costco Wholesale Corp. (>> Costco Wholesale Corporation). Millennial has captured a large segment of its market--its advertiser clients include 23 of the top 25 national advertisers as ranked by Advertising Age magazine--and its top-line growth is impressive, with revenue doubling in 2011 to $103.7 million.
Bankers, meanwhile, have become more optimistic about the months ahead, and say they expect larger deals to start launching now that performance and pricing has improved.
"I'd say there was a lot of talk in January and mid-February about issuance being slow relative to the year before, and there was curiosity about whether it would pick up," said Mark Hantho, global co-head of equity capital markets for Deutsche Bank. "Since then, we have seen an acceleration in issuance both on the follow-on side and the IPO side, which has encouraged other issuers to follow. As we go into the second quarter we should see that pace pick up as companies finish their audited financials for the year, and they will use those results as a springboard to go to market in April and May. I think we will see a substantial pickup."
Lest anyone begin to smell a bubble brewing in IPOs, two other companies launched IPOs on Thursday that received polite responses, while a third tanked. Industrial-parts manufacturer Rexnord Corp. (RXN) made modest trading gains, closing up 11.1% from its IPO price of $18 after pricing at the low end of its expected range. E-commerce company CafePress Inc. (PRSS), which allows consumers to customize everything from T-shirts to water bottles, closed essentially flat with its IPO price of $19 after selling its shares above its expected $16-to-$18 range.
Trailing behind was early-stage biopharmaceutical company Merrimack Pharmaceuticals Inc. (MACK), which closed down 13.7% after pricing below its original $8-to-$10 range.
Three more stocks are expected to begin trading Friday, though none are expected to be as warmly welcomed as Millennial. If they do launch, however, this week will prove to be the busiest for IPO issuance since 13 deals priced in November 2007.
-By Lynn Cowan, Dow Jones Newswires; 202-257-2740; firstname.lastname@example.org