Cautious Perspectives on Recovery in the IPO, M&A, and Credit Markets


The second half of 2009 provided a good measure of optimism, easing some of the pain investors felt toward the end of 2008 and in early 2009. The stock market has been volatile but up significantly overall. There are signs of increased lending activity. Mergers and acquisitions have picked up. And there’s a pulse in the IPO market.

Yet despite indications of recovery, we shouldn’t be lulled into thinking we’re over the crisis. The labor, housing, and consumer markets are still struggling. And there’s still plenty of fear and uncertainty as we emerge from the longest downturn since the Great Depression.

Keeping that cautionary note in mind, what do the recent positive strands of hope in the IPO, M&A, and credit markets tell us?

To begin with, a potential increase in IPO listings isn’t necessarily a signal that capital markets have returned to normal. Why? Because the companies coming to market are the best of the best, the ones who have survived the past 24 months of havoc and have continued to build on sound business fundamentals.

And that’s the point—we’re not out of the woods yet; every company that wants to go public isn’t going to succeed. After the initial IPO backlog is worked down, the next wave of public offerings, if any, will continue to present a challenge and will come from specific sectors that investors see as the leaders in potentially expanding markets—for example, health care services and technology, financial services, and software and software services. Other, more traditional companies that can provide a compelling investor advantage and return will also be in the IPO mix.

Job growth in the health services and education sectors and annualized spending growth in the equipment and software sectors—ranging from 10 percent to more than 30 percent from Q3 2008 to Q1 2009, and evidenced by recent quarterly earnings growth by industry leaders—give some hint of recovery as well as an indicator of where the money may flow in the near future. Still, even though many institutional money managers need to invest and are waiting for the right opportunities—including IPOs—don’t expect to see a boom.

In fact, it may end up that growth will be fueled more by the credit markets than by the equity markets. The commercial credit markets that help fund corporate growth and M&A activity should loosen and provide meaningful capital in 2010, albeit not at historical leverage levels. The challenge for every company (even those with healthy balance sheets) will be how to take advantage of the credit markets to make strategic acquisitions and generate sustained and accretive growth that may not be available organically in a still-soft economy.

Recent trends suggest there will be a good many deals available at relatively low valuations, setting up a perfect alignment between supply and demand in the M&A field. An increased availability of capital, combined with an increased appetite on the part of acquiring entities, an influx of motivated sellers, and a need to put accumulated and conserved cash to work, should mean more M&A and investment activity in 2010.

There has also been a basic shift in the makeup of the markets—public and private—exposing a gap at the midterm deal stage for emerging and growth companies. This stage generally involves increased investment and risk in many industries. So if you have IPOs at the extreme top of the liquidity pyramid, and venture capital firms at the early-stage investing phase, then M&A and private equity firms can be expected to fill in the middle. In addition to accommodating this shift, entrepreneurs and company leaders will need to decide early on what their target liquidity market is.

Working this through is critical, and it will directly affect a company’s structure, product mix, customer base, and forward-thrusting focus. Will the emphasis be on mass development, marketing, and investment to show astounding growth that will attract IPO interest? Will it be on limited customer testing to prove to strategic acquirers that a market exists for the company’s product or technology? Or will it be on building a foundation that provides for steady and conservative growth and cash flow that interests private equity or growth capital investors?

Every investor and lender today is asking, “What’s the business?” and “What’s the opportunity?” But they’re also asking an even more important question: “What will this investment mean three, five, or ten years from now?” Companies need to have solid answers to these questions in 2010 if they want to succeed in the new market environment that’s taking hold as we enter the second decade of the 21st century.

Taft Kortus is a partner in the technology and life sciences group at Moss Adams, an accounting and consulting firm based in Seattle. Follow @

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