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IPOs on deck, but not a tech company among them

A trickle of public offerings is expected to make its way to Wall Street this week. But the high-tech industry appears to be on the sidelines.

Several young companies anticipate initial public offerings this week, but there's not a single high-tech outfit among them.

There's one green-tech company however. Changing World Technologies, a company that converts waste into oil, is one of four IPOs poised to hit Wall Street this week. Changing World is scheduled to price its IPO as early as Wednesday and could raise as much as $42 million, if it prices on the high end of its $11 to $15 per share range.

Nonetheless, while the four Wall Street prospects offer some excitement to their investors, there's little reason to believe that with a recession in full swing many companies will line behind them.

"If these four companies are able to successfully complete their IPO and post positive returns for at least a couple weeks, it could motivate some of the companies that have recently filed (to go public). But I don't see the flood gates opening. It takes time for the IPO market to come back," said Paul Bard, research director of Renaissance Capital, an IPO research and investment management services company.

One of the most recent companies to file its paperwork to go public is OpenTable, an online dining reservations company. One investment banker, who requested anonymity, noted OpenTable faces a number of challenges if it moves forward with an IPO during this recessionary climate.

Fewer people are dining out, as the unemployment rate soared to 7.6 percent in January, presenting a potential slowdown in business, noted the investment banker. OpenTable's annual revenues of approximately $40 million in 2007 and the first nine months of 2008 are roughly half the level investors like to see in an IPO.

OpenTable, having just filed its paperwork, however, is still a number of months away from doing its road show to talk with potential investors and hammering out its IPO price. For many in OpenTable's situation, there's no rush: some companies have languished in the IPO pipeline for over half a year and longer.

Companies set to price their IPOs and begin trading this week, in addition to Changing World Technologies, include Mead Johnson Nutrition, an infant formula maker, and O'Gara Group, a homeland security defense company. Both Mead and O'Gara are scheduled to price their IPOs Tuesday after the markets close and begin trading Wednesday, according to their underwriters.

Madison Square Capital, a real estate investment trust, is expected to price its IPO as early as Wednesday night, as with Changing World, and begin trading on Thursday.

Renaissance Capital's

The disappearing IPO market
They'll be among the few in recent months to brave the public markets. The number of U.S. IPOs fell last year by 85.7 percent to 29 deals across all industry sectors, according to Thomson Reuters. Within the tech sector, that decline was even sharper--dropping a staggering 90 percent to four deals last year.

But don't entirely write off 2009 quite yet.

"If you can say there is any consensus at all, overall, it feels like investors believe the market will recover in the middle of the year and, typically, IPOs have been a lagging indicator to the overall market," said David Ludwig, managing director of equity markets for Goldman Sach's technology, media, and telecom practice. "Usually it takes a quarter or two for IPO market to become robust again once the market turns."

He noted, however, that given the IPO dry spell has lasted longer than in the past, there may be more companies willing to launch an IPO before the markets turn, especially if some of the first deals that test the market are well executed.

The last IPO to hit the markets was Grand Canyon Education, an Arizona-based online university that ended nearly a four-month IPO dought, when it debuted in late November at $12 a share. Grand Canyon's shares have outperformed the markets since its debut and the stock reached as high as $20.25 a share on Monday.

Who's on tap?
The performance of Grand Canyon apparently brightened the prospects for Bridgepoint Education, another online university, which filed its IPO paperwork with the Securities and Exchange Commission in late December. There's a reason both online schools appear to be doing well.


"Bridgepoint and Grand Canyon are educational companies and in a recession, when people are out of work, they go back to school," said Lise Buyer, founder of Class V Group, a firm that advises start-ups on preparing their companies to go public.

Other tech companies that recently filed IPO papers and remain in the IPO pipeline include Rosetta Stone, a foreign language training software maker, Emdeon, an automated payment system for the healthcare industry and Internet company OpenTable.

Although nearly two dozen companies have filed formal IPO paperwork since the market malaise in October, many are getting cold feet, Bard said. Since the start of the year, two companies have filed for an IPO while seven have withdrawn. And last year, 150 companies filed plans to go public but 184 companies withdrew, according to Renaissance Capital's

Within the technology sector, the companies that show the greater potential of offering up IPO candidates in this down market include software and services, which are viewed as defensive sub-sectors, said Cully Davis, managing director of Credit Suisse's technology practice for equity capital markets.

Meanwhile, other areas that appear to have gained some of that interest, investment bankers say, are security software, subscription-based services, network management, businesses around Netbooks, solid state drives, and clean tech.

Historically, tech and health care companies have been the lifeblood of the IPO market. Last year, tech and health care both ranked second with four IPOs each, behind the energy and power industry, which accounted for seven of the 29 deals that launched during the year. But in 2007, tech dished up the most IPOs with 40 of the 203 deals, followed by health care with 39 deals, according to Thomson Reuters.

What makes for a good IPO candidate?
Companies with lower capital costs will have an easier time posting a profit and, as a result, stand a better chance of launching an IPO, noted Buyer, who also cited annual revenues in excess of $100 million as another key item companies need to aim for.

Currently, the number of executives and venture capitalists seeking out bankers to take the companies public has substantially dropped, as they focus more on operating their businesses in the current economic and valuation environment, Ludwig said. But for those companies that are closer to being ready to access the markets, there's still interest.

There are caveats, investment bankers say. A couple years ago, tech investors wanted to latch onto IPOs that featured smaller companies with hyper-growth achieved through investing into sales and marketing, said Davis. But now, with their portfolios down, investors are less interested in hyper-growth companies and more focused on demonstrated profitability and realistic growth.

So when will the IPO market comes back again? Most likely, when investors decide a fresh face on Wall Street is a better bet than investing in an old one.