The research shows that the price of 10 main market IPOs that occurred in 2011 and 2012 rose 19.2% above their listing price by end of January 2013, compared to an 8.8% rise by the FTSE 100 in the same period. Still, the index has already climbed 8% year to date; so perhaps this signals the best time for a new listing.
On a global scale, high profile IPOs have failed to ignite investors’ imaginations – think Facebook or Groupon – while UK IPO volumes have collapsed since the financial crisis.
The likes of Glencore and Ocado were deemed to have failed to live up to expectations, though Direct Line is one of the successes, as is Russian precious metals miner Polymetal, which last week denied it was in merger talks with peer Polyus Gold.
“There is a misconception that IPOs are a bad investment and that it is better to keep your money in already listed stocks. 2010’s results perpetuated this view,” says John Hammond, head of Deloitte equities capital markets.
“Our analysis shows that the picture is changing as recent IPOs have performed 11% better than the FTSE. This is a striking differential and shows that IPO valuations are now being set at a level where investors can make a superior return. Together with a rising FTSE and reduced volatility, there is a far more positive backdrop for the IPO market in 2013.”
If there’s high hopes for IPOs this year, then it makes sense that M&A activity could also see a rise. While the prevailing economic uncertainty may mean business confidence remains depressed for a while longer, Martin Cholwill, manager of RLAM’s UK Equity Income Fund, believes large companies struggling to expand against a downbeat backdrop may look upon acquisitions as a means of improving their growth rates.
“Given the strength of corporate balance sheets and cashflows, this strategy looks entirely feasible; companies may well favour acquisitions and increased dividend payments in preference to building new factories and embarking on other capital expenditure,” he adds.
“This supports my preference for mid caps over mega cap companies. Mega caps are typically more insulated against bids and are much more likely to be the acquiring companies rather than acquisition targets.”
At a premium
Further afield, Legg Mason subsidiary Royce Associates saw more than a dozen takeovers in its US Small Cap Opportunity Fund, with transactions carried out at a good premium.
Fund manager Bill Hench says: “It is easy for companies to do deals because many targets have good balance sheets themselves, so you are no longer taking on a project that needs to be turned around.”
“In many instances, target companies are getting a nice slug of cash with the acquisition and so the starting point is much better than in the last cycle. Good acquisitions are out there and it is not just big companies buying small ones, there are a lot of strategic actions going on where smaller names are combining.”