Analysis

Market Turbulence Throws IPO Pipeline Into Question

Law360 (March 9, 2020, 9:59 PM EDT) -- Escalating market volatility threatens to chill initial public offerings activity for all but select companies as investors sort coronavirus-related fallout, experts say, potentially limiting new filings to issuers that are better positioned to withstand the current turmoil.

A screen above the floor of the New York Stock Exchange shows the closing number of 23,851.02 for the Dow Jones Industrial Average, which sank 7.8% Monday. Market turbulence prompted by the coronavirus is threatening initial public offerings activity. (AP)

Seven issuers, including four operating businesses and three blank-check companies, have publicly filed IPOs since Friday, adding to a growing backlog of prospective public companies. The prior week of Feb. 24 saw six operating companies and five blank-check companies file IPOs.

In addition, several companies filed IPOs earlier in February and January and are eligible to launch their marketing roadshows, but have yet to pull the trigger. Roadshows, in which companies pitch their offerings to prospective investors, are the final step before pricing an IPO.

But given current market turbulence, it is unclear when companies can expect friendly pricing conditions. An early-morning stock dive on Monday triggered a temporary trading halt on Wall Street, and the Dow Jones Industrial Average later closed down more than 2,000 points. It was the latest in a series of big selloffs as investors assess the economic impact of the coronavirus.

"Typically when volatility hits this level, the IPO market shuts down entirely," said Matthew Kennedy, a senior market strategist at IPO research and data provider Renaissance Capital.

Whether new IPO applicants prove resilient against current headwinds remains to be seen. Recent IPO filers include three biotechnology companies that filed for offerings on Friday, plus grocery chain Albertsons Cos.

Kennedy noted that many early-stage biotechnology companies have yet to generate revenue and build operations, which could make them less susceptible to coronavirus-related fallout. He also pointed out that Albertsons filed its IPO on a day that grocery stocks rose despite the broader market selloff.

Kennedy added that some companies in the IPO pipeline may fit a "quarantine-friendly" definition, such as companies that provide remote work solutions. Workplace productivity toolmaker Asana Inc. filed confidential IPO plans with the U.S. Securities and Exchange Commission in early February, Kennedy noted, while the stock of video teleconference company Zoom Video Communications Inc., which went public last year, is up 66% year to date.

Plus, many recent IPO applicants are blank-check companies. These are shell entities without operations that raise money through IPOs in order to pursue acquisitions. Blank-check companies, nearly all of which price their IPOs at $10 per share, tend to be less sensitive to market swings given that they have no operations until they complete an acquisition.

But the outlook for the broader market is cloudier. Monday's plunge compounded worries.

"Even last week we were saying hardly anything should be able to get done," Kennedy said. "Now it seems like the spigot is completely turned off."

The slowdown struck just as spring is approaching, typically a busy time for IPOs. However, only one operating company, Canadian waste hauler GFL Environmental Holdings Inc., has priced an offering this month. Venture-backed biotechnology firm Imara Inc., a developer of treatments for rare genetic disorders, is scheduled to price an estimated $76 million IPO later this week.

No IPOs are scheduled yet for next week, according to New York Stock Exchange and Nasdaq calendars. Sichenzia Ross Ference LLP partner Greg Sichenzia expects that companies that have not launched roadshows yet will wait for stability before moving forward.

"If you can keep your powder dry, you will," said Sichenzia, who counsels public and private companies.

Among operating companies, several issuers filed IPOs earlier in February and January and are eligible to launch roadshows but have not proceeded. Renaissance Capital said in an online brief last week that "many roadshow-ready companies are pumping the brakes" given market volatility.

The research firm listed specialty chemicals company Atotech Ltd., industrial technology company Vontier Corp., music publisher Warner Music Group Corp., building products manufacturer The Azek Co. and shoemaker Cole Haan Inc. among those holding off on IPOs.

Atotech on Monday amended its IPO filing to include updated financial statements and new disclosures accounting for risks related to the coronavirus, which broke out in Wuhan, China, in December. Scores of publicly traded companies, especially those with global supply chains, have updated their risk disclosures in recent weeks in light of the coronavirus.

Such disclosures are a standard element of securities filings that companies are required to provide in order to inform their investors of plausible business and legal risks.

"Our business and results of operations may be adversely affected by the recent coronavirus outbreak or other similar outbreaks," Atotech said in its registration statement. "We derive a significant portion of our revenue from, and maintain a significant operating footprint in, China."

Next week will shed more light on whether companies are willing to pitch IPOs in the current environment.

Companies that are eligible to launch roadshows by about March 16 include sales and marketing platform ZoomInfo Technologies Inc., construction management software company Procor Technologies Inc., health care benefits management software firm Accolade Inc., pulmonary medical device maker Pulmonx Corp., and biotechnology companies Oric Pharmaceuticals Inc. and NLS Pharmaceutics Inc.

"During periods of high volatility, companies often need to price at a steep discount," Renaissance Capital said last week. "These latest filers are either willing to take a price cut, are optimistic about the market, or are optimistic about how the market will react to them."

--Editing by Emily Kokoll.

For a reprint of this article, please contact reprints@law360.com.

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