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For a while now, Wall Street has been buzzing about the possibility of a sequel to the dot-com IPO boom of a decade ago. The question is — if it does materialize — what will it look like?
Names like Facebook, Twitter, and LinkedIn have been suggested as candidates for an initial public offering, but this new generation likely won't be relegated solely to social media startups.
Deal makers say possible candidates include semiconductor makers and information technology firms that will be touted for their traditional business models and valuation methodologies.
Any notable uptick in IPOs likely will be welcome at Wall Street investment banks, where new-issue activity has dramatically dropped off amid the credit crisis and other sources of fee income like securitization have fallen as well.
"The companies ... are going to be cash-flow generators ... that are profitable, companies with real products, from communications to internal resources making systems work better, not just dot-coms with sites trying to generate advertising revenues," says Lee Graul, partner at the BDO Capital Markets.
A recent survey of investment banks conducted by BDO Capital Markets found that market participants overwhelmingly expect the technology sector to dominate IPO issuance this year.
"Clearly, the interest in and the supply of technology IPOs is high and getting higher. We've had two years of a dry spell," says Cully Davis, head of technology equity capital markets at Credit Suisse.
As Davis sees it, "A lot of companies are still out there innovating and they need capital to grow. On the buy side, especially technology investors who manage growth funds, we see investors who are starved for significant growth opportunities."
Surpassing last year's total of tech-related IPOs doesn't appear to be too difficult a feat considering there were nine U.S. tech IPOs in 2009, with proceeds of $3.464 billion.
In 2008 the drought was more extreme: there were a mere three tech IPOs with a value of $749.2 million, according to data from Thomson Reuters.
Deal makers have to go back three years to 2007, the last robust tech IPO season. In 2007, 43 U.S. tech IPOs valued at $7.651 billion were completed, according to Thomson Reuters.
The drop in IPO volume has had an impact on investment bank earnings in recent years.
The overall disclosed IPO fees for Goldman Sachs dropped from $395.7 million in 2006 to $171.7 million in 2009, according to Thomson Reuters.
Bank of America Merrill Lynch, which topped the 2007 league tables for overall disclosed IPO fees with $346.4 million, saw its fees drop to $140.1 million in 2009.
"There's been stiff competition for assignments, so fees have gone down but those fees will come back up again. The issuers have been in control but by the end of 2010 the banks will be in control again, and fees will reflect that," says Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors, a money management and advisory firm based in Albany, N.Y.
The competing investment banks have broken into two groups, the larger companies with commercial banking arms, and a second level of boutique banks that are extremely performance-oriented and populated with bankers who have migrated to boutiques because of questions and concerns over compensation, Johnson says.
Over the past several years banks have profited from the interest rate environment. But as rates start to climb, banks are forced back to the basics of traditional investment banking.
"That side of the ledger is attempting to do a number of things aggressively, using their capital to make money trading stocks, bonds, commodities, you name it," Johnson says. "They're also doing more of the traditional roles of investment banking. It's clear that they're really focused on the investment banking side. The commercial banking business stinks. The investment banking business is starting to come back to life."
Any dramatic — and regular — return of IPO issuance would likely be most welcome among venture capital firms that need to recoup their investments in startups.
In recent years, many venture capitalists have had to resort to mergers and acquisitions as a way to cash out of their investments because they could not rely on bringing their companies to the public markets.
"There's been a lot of hype on this, the sudden opening of the IPO market," says Mark Heesen, president of the National Venture Capital Association. "Unfortunately, you have to look at the numbers. Was there an increase in registration in December? Yes. Is that a good sign? Yes. Is this a new era in IPOs? I'm not ready to go that far yet. I have been hearing this for six months now that [banks are] pushing work away."
BDO Capital Markets' Graul adds that "a lot of technology companies ... have been prepared to go to market by venture capital firms and private-equity firms who haven't been able to exit because of the market."
In what may be a recognition of larger changes in the broader economy, deal makers say the next wave of tech companies likely will include clean-tech businesses.
Codexis, a maker of enzymes used in biofuels and based in California, and China-based Jinko Solar Holding, a solar cell manufacturer, are among the clean tech companies that have registered in the past month for IPOs.
Many of these companies have benefitted from the tremendous amount of money coming from government initiatives, according to Credit Suisse's Davis.
Nearly two dozen well-positioned firms, fitting into a wide definition for tech companies and held by financial sponsors or venture capital groups, are waiting for equity markets to strengthen further as they prepare to go public, market participants say.
Still, some bankers contend the market will be excited to see IPOs from the broader digital media group, which would have an appeal to a broader audience of retail buyers because the likes of Facebook and LinkedIn are well known.
"We anticipate digital media to be the first and most active in the marketplace," says Johnny Williams, head of technology equity-capital markets at Bank of America Merrill Lynch, who is based in Palo Alto, Calif. "Additionally, we expect an even spattering among communications equipment, clean technology and software, and a somewhat lesser degree of activity in the semiconductor and services companies."