A tale of two very different IPOsSeptember 24, 2013: 11:13 AM ET
Both Chrysler and Twitter could end up with strong showings in their IPOs, thanks to healthy appetites and short memories.
By Vickie Elmer
FORTUNE -- Two iconic companies will share the Wall Street stage as they go public this fall, and despite coming from vastly different eras and industries, both could end up with strong showings in their IPOs, thanks to a healthy appetite and short memories.
Chrysler and Twitter both will benefit from the strength of other initial stock offerings in their sectors over the last year or so and the overall IPO market's strength.
"Whether there is uncertainty in Europe or Fed tapering, all that matters is whether returns are positive in the IPO market -- and they are now. Strong post-IPO returns are the key factor," says Kathleen R. Smith, a principal with IPO investment advisor Renaissance Capital. The firm's data shows some recent IPOs are up 50%, with the average above 25%.
The U.S. IPO market may be bouncing back to levels last seen in 2007, with a stream of about 110 offerings lined up in biotech, technology, and consumer goods. That doesn't count the 75 or so deals like Twitter that will use the JOBS Act to get into the public market.
"Barring an external shock, the IPO market is likely to be strong this fall. There's plenty of money around and the specter of the Facebook (FB) and Zynga (ZNGA) IPO debacles is fading," says Erik Gordon, a business professor at University of Michigan.
The IPO market is benefiting from an increased appetite for risk, says Josef Schuster, who heads an IPO research firm that manages an index fund based on 100 recent IPOs. The First Trust U.S.IPO Fund ETF (FPX) is up 33.4% so far this year, vs. 30.2% for small growth funds tracked by Morningstar and 24% to 25% growth for mid-sized funds.
Some of the market is fueled by the smaller IPOs coming out under streamlined and "secret" share registration allowed under the JOBS Act of 2012. Under the JOBS Act, companies with less than $1 billion in revenues are allowed to submit their going-public paperwork confidentially, an approach used by about two-thirds of eligible companies, according to a Latham & Watkins analysis posted on the U.S. Securities and Exchange Commission website. The law includes other accommodations for smaller faster growing companies, such as only disclosing two years of audited financial results, instead of three years that's generally required. About half of them are technology companies, with energy, health care, and real estate also plentiful, Latham reported. Some 85% of them had revenue of $250 million or less.
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The second quarter was the most active one for IPOs since the financial crisis, and by mid-August, the total U.S. IPOs had already exceeded the 2012 total, Renaissance Capital reported.
Overall, tech firms -- along with Noodles and Co. (NDLS) and Sprouts Farmers Market (SFM), a natural grocery store chain -- have shown the biggest first-day returns this year, according to Renaissance Capital's IPO data.
Most investors will compare Chrysler not to Twitter but to it its peers in the auto sector that went public in the last two years, says Renaissance's Smith. Those are supplier Delphi Automotive (DLPH), which went public in November 2011 and whose shares up up 50% year to date, and GM (GM), whose shares are up 27% year to date.
Twitter will be measured against Facebook, whose stock is up 17% from its starting gate, and LinkedIn, which is up 455% since its debut in May 2011. LinkedIn (LNKD) had one of the biggest first-day bounces of all IPOs, a 109.4% gain.
"It's sort of new economy and old economy," University of Michigan's Gordon says. Yet he believes Twitter and Chrysler's market valuations after their IPOs could be fairly close to each other -- both at roughly $10 billion to $12 billion.
Many other IPOs in the pipeline follow that dichotomy: Hilton Hotels, Claire's shops, and RE/Max are old-school companies going public. Tech security firm Fire Eye and Chegg, which provides e-textbook rentals and online homework assistance, are among the new economy offerings.
Both Twitter and Chrysler have strong consumer brands -- Twitter's blue bird logo is widely recognized, and the social media service is used in many countries. Chrysler's "Imported from Detroit" ad campaign has driven home its mix of muscle, polish, and grit. Its cars are sold mainly in the U.S., though.
Yet the companies are "polar opposites," Gordon noted, with Twitter barely seven years old and Chrysler founded before the Great Depression.
"Chrysler is old, in an industry better known for bankruptcies and bailouts than for excitement, and whose coolest product was introduced a decade ago. Buying the Twitter IPO is betting on the future. Buying the Chrysler IPO is betting that Fiat will buy you out for a modest profit in a year or two," he says.