October rally shows signs of continuing

IPO activity began to rebound in October after summer lull, with life sciences and technology offerings leading the resurgence.

Nine venture-backed companies went public in October, raising a total of $852 million. All but one (drug developer Targanta Therapeutics) were trading higher at the end of the month. Top technology and life sciences performers included Trans1, a provider of treatments for lower back pain, and Constant Contact, a developer of direct e-mail marketing software.

Altogether, venture-backed IPOs raised more money in October than in any other month since June, when proceeds topped $1 billion. Funds raised from VC-backed IPOs also topped $1 billion in February, March, April and May.

Despite a downturn in both the broader market and the Nasdaq in particular in early November, Scott Gehsmann, a capital markets partner in PricewaterhouseCoopers’ transaction services group, is optimistic that more companies will go public in Q4. Barring unforeseen market turbulence, he says,“Q4 IPO activity may challenge the robust fourth quarter of 2006, when 89 IPOs raised almost $20 billion.”

Q4 IPO activity may challenge the robust fourth quarter of 2006, when 89 IPOs raised almost $20 billion.

Scott Gehsmann

As of the middle of the month, November was shaping up as a moderately active period for new VC-backed issues. In the first two weeks of the month, seven venture-backed companies went public on U.S. exchanges. Larger offerings included Neutral Tandem, a provider of interconnection services for telcos, Bioform Medical, a developer of injectable implant products, and Nanosphere, a nanotechnology-based life sciences company.

For the past few months, extreme volatility in the broader markets has made it harder to time pricing of new issues. “Nobody wants to price their deal on a day the Dow is down 300 points,” says Gehsmann. Even if the stock price recovers shortly afterward, the company leaves a lot of money on the table by picking an off day to debut.

“If they get upside on an IPO, the proceeds go to the company,” Gehsmann notes. “While if they get it in the aftermarket, the proceeds go to those who bought the stock.”

Still, given the high volume of companies in registration for IPOs, Gehsmann predicts the pace of debuts will gain momentum in the weeks leading up to Christmas. This is in part because most companies in registration have fiscal years that end on Dec. 31, he says. If they don’t go public by the end of the year, they’ll have to complete a time-consuming year-end audit and will most likely have to wait until around February to begin trading. —Joanna Glasner