Piper goes thirsty in the IPO desert

The loss of appetite for initial public offerings this year has put Minneapolis-based Piper Jaffray & Co. on a starvation diet -- a $33 million swing from feast to famine.

The lean times may continue for the rest of this year and into 2009, according to analysts who watch Piper Jaffray and its staple business -- new stock offerings by mid-cap companies.

Piper's results, analysts agree, reflect circumstances largely beyond the company's control. Jittery investors, in the wake of spreading setbacks in credit markets, are loath to buy newly issued shares. And companies don't want to price an IPO at $10 today when they might get $20 next year.

In the first half of 2008, Piper Jaffray lost $8.5 million, compared with net income from continuing operations of $25.1 million in the same period a year earlier.

Piper Jaffray shares recently have been selling in the mid-30s, down from a 52-week high of $58.76 in October but up from a 52-week low last month of $24.68.

"I don't think there will be many catalysts that push the stock up in the near term," said Ada Lee, securities analyst at Sterne Agee in New York. "2009 will continue to be difficult for all investment banks.

"I probably would see more downside than upside at this point," she said.

Other analysts also hold grim views concerning the outlook.

"The IPO market has dried up, almost to the point where it's a nonexistent business," said Horst Hueniken, securities analyst at Thomas Weisel, a brokerage firm in Toronto.

"It's hard to say one company is gaining ground or losing ground, relative to its competitors, when the market is virtually closed."

Steve Stelmach, at Arlington, Va.-based Friedman, Billings, Ram-sey, said, "The macro market is pretty miserable. Until you see an improvement in the investment-banking outlook, it's hard to be excited about Piper or any others in the industry."

In his 29 years in the business, Piper Chairman and Chief Executive Andrew Duff said he's not seen the likes of current conditions.

"I would say the credit cycle we're currently going through is among the most difficult I've ever seen," he said.

"I think our performance, while obviously diminished, was in line with what's going on in the industry," Duff said.

"There is very little capital being raised for IPOs or secondary offers. The bulk of what has been raised is rescue capital."

Across the nation, 23 IPOs were unveiled in the first half of the year compared with 119 in the first half of last year.

Until this year, the low was 75 for all of 2002.

Worldwide, the numbers were also bleak. Global IPO volume fell 49 percent in the first half compared with a year earlier, by the account of market-watcher Dealogic.

The dive was sharper in the second quarter, with deals down 66 percent worldwide.

It's not that companies aren't interested in going public. Many start the process, but back out, hoping for more interest in the future. In the first half 2008, the number of IPOs withdrawn or postponed reached a high not seen since the second half of 2000.

To cope with the troubled environment, Piper Jaffray has embarked on cost-cutting measures. Its Minneapolis head count is down by more than two dozen from a year ago.

Meanwhile, the company has made opportunistic moves to bolster a line of business that haven't been impaired by the quaking credit market: The still-healthy public finance market, where debts are backed by the ability to tax or impose fees.

When investment banking giant UBS moved out of the public finance business this year, Piper Jaffray snapped up more than a dozen former UBS executives to bolster its prospects in the active West Coast municipal business.

"It's a very attractive market that's relatively stable," Duff said.

Piper Jaffray also staffed up a new media, entertainment and technology specialty business on the East Coast.

Meanwhile, the company went about strengthening its balance sheet, reducing exposure to the troubled "auction-rate security market" by shedding, at par prices, $300 million from its first-quarter holdings of $350 million.

Stelmach said that Piper Jaffray has done a better job than many of its rivals at clearing its balance sheets of questionable credits.

"To the extent they can tread water better than the others in the industry, they should be OK," he said.

Mike Meyers • 612-673-1746