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September 2000

Equities: after the flood


Equity capital market bankers are in a state of shock. It’s not simply that their market has seen record volumes of issuance this year. It is rather that the international equities market has gone through an entire lifecycle of change in less than 12 months. Michael Peterson reports




Only a year ago the new economy was still a wholly American concept. There had been no more than a couple of internet IPOs in Europe, and these equities were languishing below their issue price. Germany's Neuer Markt was the home of small traditional media companies, not internet start-ups. And the rest of Europe seemed to have few growth companies of any description.
       
Since then, Europe has seen a deal frenzy, with investors clamouring First for consumer internet stocks, then business-to-business stories and then technology providers. The market has gone through cautious optimism, heady euphoria, a frantic sell-off and back to caution. European retail investors have caught the day-trading bug and become a key part of many deals. And all the while, there have been phenomenal volumes of issuance from large established companies, supplying a continent-wide hunger for equity.
The sheer volume of issuance has made life difficult for issuers and investment bankers. So has the volatility which followed the sharp fall in technology share prices earlier this year. As a result there have been plenty of casualties. Deals have been cancelled, issue prices have been scaled back and some deals have performed abysmally in the after-market. According to Capital Data, there was $149 billion-worth of international equity issuance in 1999, with western European companies raising just under $82 billion in IPOs, secondary offerings, rights issues and other equity sales. For the First six months of 2000 the total was $116 billion, $68 billion of which was from western Europe. There were a total of 343 offerings by western European companies in the First six months of 2000, compared with 441 in the whole of 1999. East Asian issuance has been growing at a similar blistering pace, with 331 deals raising $36 billion in 1999 and 265 issues worth a total of $25 billion in the First half of 2000. But it is in Europe that the fever for equity raising has caught hold with most vigour. At one point early in 2000, the volume of equity issuance for the year in Europe was higher than the total for the domestic US market.
The internet bug hit Europe's equity markets in the Final weeks of 1999. It had not been easy to sell mature businesses for much of last year, but in early 2000 investors shunned everything that was not connected to the internet. "At the beginning of the year you could hardly sell anything that wasn't new economy," recalls Edward Cumming-Bruce, global head of equity capital markets at Dresdner Kleinwort Benson.
The failure of online fashion retailer Boo.com in mid-May marked the end of investors' infatuation with consumer internet companies. But the initial burst of internet euphoria lasted only until late March when support for inflated dot com valuations suddenly fell away. "The correction when it came was very clean and quick," says Tom Ahearn, head of equity syndicate at Credit Suisse First Boston. "Within the space of only a week or so the market had adjusted to the new price levels."
Euphoria breeds excess
Rarely before has the general public been so aware of the performance of IPOs as it was in the First half of 2000. And the retail-driven furore inevitably brought excesses. The two most notorious examples of mishandled IPOs both came in March. Two internet ventures, Lastminute and World Online, saw their share prices fall dramatically in the weeks after their Flotation. They attracted controversy for different reasons. World Online was undermined by its founder's secretive attempt to sell stock, a transaction which underwriters Goldman Sachs and ABN Amro Rothschild had presumably failed to spot. In Lastminute, the mistake was one of pricing."The new economy surge was something the market had never seen before," says Michele Colocci, head of equity capital markets at JP Morgan in London. "Certainly, in all the frenzy mistakes were made - by investors, by issuers and by investment bankers. But the market has learnt a lot and has moved on to its next phase."
The biggest problem may simply have been that companies were brought to the market too early in their life cycles. "You had new economy start-ups coming to market at phases of development that were unthinkable only a year ago," says Colocci. "Now there are still companies and investors who want to play the private-equity game in the public markets but they are a dwindling number."
Equity capital market bankers believe the poor performance of so many IPOs was simply a reflection of the number of transactions and their high-risk business models. "There has been a huge volume of deals," says Charles Kirwan-Taylor, co-head of European equity capital markets at Credit Suisse First Boston. "The First half of 2000 has been a record six months with volumes equivalent to 80% of the issuance in the whole of 1999. The fact that so many companies were able to raise capital means that the market as a whole has been working efficiently."
Inevitably, it is more difficult to price an IPO in an industry which is evolving rapidly. "If you exclude new economy stocks, which you would expect to be more volatile, the after-market performance of IPOs has remained very consistent," says Kirwan-Taylor. "Traditionally, you would expect an IPO to trade up by between 10% and 15%. On average, that is still happening if you take out the riskier stocks."
High profile, growth-industry IPOs were the deals all equity underwriters wanted to lead this year. But although their volume increased dramatically between 1999 and 2000, Flotations still do not account for the majority of equity issuance. In the First half of 2000, IPOs represented just under 39% of all equity issuance, up from 33% in 1999 as a whole.
Other types of offering continue to make up the bulk of the market. Secondary deals and rights issues are the most important of these. But there have also been a substantial amount of block trades - although these deals now tend to be termed "accelerated bookbuilding" since block trades are now excluded from the Figures on primary equity issuance.
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