'Disastrous' time for IPOs

Jay Adelson should feel relieved. The CEO of popular online news site Digg raised $28.7 million in September, just as the sources of capital for young companies were evaporating in the midst of the credit crunch.

But Adelson isn't breathing easy. That's because the next time he needs funding, he'll likely have to do an initial public offering in the stock market, and no one is much interested in those right now.

IPO for Digg in '09?

"We are going to be much more cautious with how we spend capital going forward," Adelson says. He knows he has to make his company profitable as soon as possible. "At least for the foreseeable future . . . there are no IPOs that are going to happen."

What's ahead for Digg?

In 2008, the IPO window shut tight. Experts say it might not reopen until the second half of 2009 -- and likely even later.

"For anyone who . . . had planned to go public in '08 and '09, certainly the window is not there," says Gil Forer, the global director of IPO initiatives at accounting giant Ernst & Young. "The volatility is just crazy right now . . . and to see critical mass in IPOs you need stability for quite some time."

Hotly anticipated IPOs

This year was one of the worst for IPOs. Just 745 companies debuted on stock markets worldwide during the first 11 months of 2008, according to Ernst & Young's Year-End Global IPO update, released Dec. 9. That figure is down more than 58% from the 1,790 IPOs during the same period in 2007.

The IPO market looks even worse when considering the cash raised. During the first 11 months of 2008, about $95 billion was generated through the sale of initial offerings of stock. That's down 63% from $256.9 billion for the same period in the prior year.

This year, concerns about the extent of the recession -- coupled with fears about the health of the financial system -- led investors large and small to flee equity markets for the safety of bonds. Those who remained in the equity markets were more likely to place value bets on large companies with proven business models rather than newly public, relatively untested companies, says Scott Sweet, a senior managing partner of IPO advisory firm IPOboutique.com.

The result, says Sweet, was the worst atmosphere for IPOs he has seen in 35 years covering the IPO market.

"If I had an IPO that I wanted to float, I wouldn't do so now," says Sweet. "IPOs are really in disastrous shape."

Many companies planning to go public this year opted to stay out of the market entirely. Nearly 300 companies scheduled to go public in 2008 withdrew or postponed their applications, according to Dealogic, an investment banking technology firm that studies the IPO market.

But larger private companies can't put off initial public offerings indefinitely. As these companies scale up, so do their capital needs. The cost of expanding internationally, buying a major competitor or starting a new product division is beyond what even large venture-capital firms can provide. Unless the larger private companies can tap the IPO market, they can't continue to grow -- or even survive.

"Some of these companies are going to fail," Sweet says. "Venture-capital firms are only taking the very best. They don't want to tie up their money. The credit crunch has made it very, very difficult for any company to get money."

Ernst & Young's Forer says interest in IPOs won't pick up until investors see stability in the equity markets. That could take years.

"I think when you speak with investment bankers, we hear a lot about the end of 2009, but I think they are being paid to be positive," says Forer. He recalled that the IPO market took two years to recover after the Internet bubble burst. "This recession is about the fundamentals, and I think it is much deeper."

By the second half of next year, Sweet says, there may be a trickle of companies testing the waters with initial public offerings. If those IPOs go well -- meaning there is significant, sustained demand for the stock offerings -- then perhaps 2010 will be a healthy year for IPOs, he says.

Adelson, the Digg executive, isn't taking any chances. He plans to make Digg profitable within two years by aggressively expanding advertising and keeping spending down.

"You have to get there on your own," says Adelson. "When the market returns in two, three, four years, maybe there is an opportunity."

Produced by Darragh Worland

Published Dec. 29, 2008