Author: Gordon Platt

GLOBAL EQUITY/DRS

There were only five initial public offerings in the US market in the third quarter, with no IPO activity after early August. In Europe, withdrawn IPOs were at the highest level in the past five years in the third quarter, with 51 issues worth a potential $14.4 billion pulled from the pipeline, according to Thomson Reuters.

With global stock markets falling sharply in early October, a fourth-quarter rebound in IPOs appeared unlikely. “To the disappointment of many US underwriters, there was no post-Labor Day boom in the equity market as seen in previous years,” Thomson Reuters said in a report on equity capital markets in the third quarter. Market conditions were deemed hazardous, it said.

Banks seeking to raise additional capital to offset rising loan losses or to fund acquisitions bolstered equity capital market volume, despite the dearth of IPOs. US equity capital market proceeds totaled more than $191 billion in the first nine months of 2008, a rise of 14.2% compared to the same period a year earlier. However, the number of deals fell by 43.2%.

Bank of America raised $10 billion on October 7, a day on which its stock price dropped by 26% following the announcement of worse-than-expected earnings and a dividend cut. Two weeks earlier Goldman Sachs raised $5.7 billion from investor Warren Buffett’s Berkshire Hathaway. Before then, J.P. Morgan raised $11.5 billion.

Global equity and equity-related underwriting volume in the first nine months of 2008 fell to $389 billion, the lowest since the first nine months of 2005, according to Thomson Reuters. The level for the third quarter was 44% below that of the previous quarter.

Despite the decline in global issuance, the Saudi Arabian market experienced a 162% increase in equity issuance in the first nine months of 2008 compared to the same period a year earlier. The Saudi stock exchange also had the third-highest number of new listings, with six IPOs in the first three quarters of this year. Saudi Arabia, helped by oil profits and a government focused on diversifying its economy, was the only country to experience an increase in total proceeds in the third quarter, according to Greenwich, Connecticut-based Renaissance Capital. Soaring gold prices helped Saudi gold miner Ma’aden complete a $2.5 billion IPO, the largest of the third quarter.

While the emerging markets hosted nine of the 10 largest IPOs in the third quarter, year-over-year activity still declined sharply. Since peaking in the fourth quarter of 2007 with $33.1 billion in capital raised, IPO activity fell to just $2.3 billion in the third quarter of 2008 in the BRIC countries (Brazil, Russia, India and China). This was the slowest quarter for BRIC IPOs since the third quarter of 2005, according to Renaissance Capital.

“While the recent re-capitalization of market bellwethers General Electric and Goldman Sachs may shore up confidence in the equity markets in coming months, we do not foresee a full recovery of the IPO market until returns improve significantly,” Renaissance Capital said in a report on its IPOhome.com website. “This will require that underwriters price deals conservatively and that management teams lower internal valuation expectations,” it said.

Fairfield, Connecticut-based General Electric sold $12.2 billion of new shares to finance its operations. Warren Buffett’s Berkshire Hathaway purchased an additional $3 billion in GE’s preferred shares.

Goldman Sachs raised $5 billion in a public offering of common shares. In addition, Berkshire Hathaway made a $5 billion strategic investment in Goldman Sachs in the form of perpetual preferred stock. Berkshire Hathaway also received warrants to purchase $5 billion of Goldman Sachs common stock at $115 a share at any time in the next five years.

J.P. Morgan led the equity and equity-related underwriter rankings in the first nine months of 2008, with $51 billion in proceeds, according to Thomson Reuters. Citi ranked second, with $37.9 billion in proceeds.

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Gordon Platt