What A Secret Indicator Is Telling Me About
The Market
The Dynamic Wealth Report
April 5, 2010
When I was an investment banker, I frequently talked with companies
about the best time to raise money. These were huge decisions
being made by the management team, the board of directors, and their
venture capital investors.
Why was it such a big deal?
Taking a company public isn’t easy or cheap. Completing an IPO
takes months of work. And most of that work lands in the lap of
the management team. If they’re focused on the IPO, they’re not
focused on the business. It can be a distraction.
Fees get costly. Legal, accounting, travel, and not to mention the
banker’s fee… It all adds up to millions. Regardless of
the deal’s success, the lawyers and accountants always got paid.
Picking the wrong time to go public could be devastating.
You could waste months and only raise a fraction of the capital you
need. Even worse, you could get to the end of the road and find
yourself standing empty handed.
How devastating could it be?
For one company, the results were nearly terminal.
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A few years back, my firm was raising just over $50 million for
a tech company in an IPO. The money would have cemented their future.
They could have expanded the business, hired new employees, secured a
big contract, and become a major player in the industry.
But, the markets were bouncing all over the place… and tensions were
high.
Management had spent more than seven months working on the fundraising
and they were in the hole almost $2 million in lawyer and accounting
fees. They were on the roadshow, meeting with investors. Hopes were
high.
Then, Ronald Regan died.
The markets were closed for his funeral. As a result, the roadshow was
delayed by a single day.
But, one day was all it took. The very last day of the roadshow, the
markets started pulling back. Investors got nervous and they started
pulling their orders. Interest in the deal dried up right before our
eyes.
My firm was 24 hours from a multi-million dollar payday and the company
could see the $50 million in the bank.
To make a long story short, the deal collapsed. The company never
raised the money they needed. Within two years, they were broken up and
sold to a competitor at a fraction of its value.
Clearly the risks of going public are high.
That’s why I watch the IPO markets like a hawk. It’s my secret
indicator of investor confidence.
Most IPOs are sold to institutional investors, guys running hundreds of
millions or billions of dollars. If their market outlook is positive,
they’re happy to buy IPOs all day long.
When they get the slightest bit nervous, the first thing they do is
stop investing in IPOs.
It’s a simple thing to watch, and what I’m seeing today is great news.
A number of companies have completed IPOs recently. Two in particular
jump out at me… MaxLinear (MXL) and
Calix Networks (CALX). These technology companies just
successfully completed their fundraising and their stocks are trading
higher after the offering.
It’s a great sign institutional investors are positive on the future of
the market… and technology companies in particular. Just reading the
tea leaves here, I think the technology sector will continue leading the
market higher over the next few months.
Investor confidence is high and that bodes well for the rest of the
market.
If you want to get a good grasp on investor confidence, keep your eyes
on recent IPOs. They can tell you more than you imagined.
• Hotel Industry (Up 17%)
Consumer confidence is rebounding and consumers are spending again. The
hotel industry is starting to show signs of life. Companies like
Orient-Express Hotels (OEH) and Gaylord
Entertainment (GET) are leading the industry higher.
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