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Summary:

The stock market’s ongoing sell-off has many people wondering whether the wave of tech company initial public offerings will soon sputter to a stop. But some financial industry experts say the current market volatility does not necessarily mean that the IPO window is closed.

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The stock market’s ongoing sell-off has some people wondering whether the wave of tech company initial public offerings (IPOs) will soon sputter to a stop. After all, IPOs are scheduled according to the market’s appetite, and many public market investors were quick to walk away from newly public Internet stocks when the going got tough in recent days.

But some financial industry experts say the current market volatility doesn’t necessarily mean the IPO window is closed for prospective newcomers such as Zynga. Here are a few main takeaways from conversations I’ve had with senior bankers about the current financial environment:

  • Look around; It could be worse. Although the market for publicly traded U.S. tech stocks may be battered, many still believe that the sector is likely to fare better than most others in the long-term. That’s why a lot of money managers — the big investors in today’s stock market — will continue to invest in technology, and have an appetite for more tech IPOs. “If you’re an asset manager, you have to put the money to work somewhere. You can’t put it in the mattress,” Paul Deninger, a senior managing director of investment bank Evercore Partners said. “Whether the market is good or bad, many investors are going to be looking at stocks relative to their other opportunities. And on a relative basis, the growth potential of these IPOs is still extraordinary.”
  • Delays may not indicate fear. “This environment is really only a couple of weeks old, and the IPO process takes a while,” Morgan Keegan managing director Peter Falvey said. “Even in more normal times, it is very, very difficult to price IPOs.” And while some companies may be waiting on the sidelines a bit longer before going public, it may not be because of a lack of appetite for their stock: They could just be waiting for another lull in the financial news cycle. “Companies going public also want to make it a marketing event,” Falvey pointed out. “Right now, people are only talking about the general volatility in the markets.”
  • For new tech stocks, it’s a correction, not a crash. Though the recent downward impact to newly public Internet companies has been especially severe, that doesn’t have to mean that all web companies will suffer a similar fate in the future. Newly public companies such as LinkedIn debuted at such sky-high stock prices that they may have been destined to come down at some point or another. “The hit that LinkedIn took could just be an example of the market taking the air out of the stock,” Deninger said. That means that future IPOs don’t have to be delayed — but that they must be priced more carefully to avoid a similar fate. “In the tech sector there’s been some criticism over the pricing of some of these companies,” Falvey said. “It’s exacerbating what is already a difficult problem.”

At the same time, it can’t be stressed enough that it’s still too early to know exactly how this will all play out for the Internet industry and the economy at large. But for people who work in technology and new media, it may be good to hear that the industry’s recent wave of good fortune may not be crashing down just yet.

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  1. IPOs motivated by the sunset on VC funds — think CafePress — are likely to find the climate a lot more challenging going forward.

    IPOs of massive money losers like Groupon and Living Social are going to find the valuations a lot less frothy.

    IPOs of legal cash machines like Zynga? They can put Alfred E. Neuman’s picture on the prospectus. They’ll be just fine.

    1. Colleen Taylor Mark Tuesday, August 9, 2011

      All good points Mark. Thanks for the comment.

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