No Little People?

Where have all the small IPOs gone?

One of the unfortunate side-effects of the financial crisis has been the consolidation of the financial sector, especially brokerage firms. When Merrill Lynch, Bear Stearns, or National City got in trouble, they were merged into Bank of America, JP Morgan, and PNC. Other firms, like Lehman Brothers, just went away. The too-big-to-fail banks became even bigger.

This has had an impact on the initial public offering (IPO) market. Everyone loves to discuss mega-IPOs like Facebook, which raised $14 billion, or Dunkin Donuts, which raised $400 million. In order to have an impact on their earnings, the big banks compete to manage these big IPOs. This creates huge demand for huge deals, with potential for huge stumbles, like Facebook.

But these high-profile companies don’t really need brokerage firms to manage their public offerings. Everyone knew about Facebook and Dunkin Donuts. They could have gone public via an auction process, as Google did in 2004. They raised $1.7 billion cutting out much of Wall Street—a record at the time. But it’s small firms that need the expertise and exposure that major dealers can provide.

Some very famous firms started small: Intel raised only $7 million in its IPO; Microsoft raised $30 million. These firms didn’t need the cash, but they did need the liquidity. They needed to be public companies so they could use their own stock to compensate employees and make acquisitions. And they needed advisors to help them tell their stories to the institutional investors who can make or break a small IPO.

But there is little virtue in being small today. With mega-firms competing for mega-IPOs, at least in finance today, small is not beautiful.

Douglas R. Tengdin, CFA
Chief Investment Officer
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