business

Last autumn, a comeback in the IPO market seemed as certain as Sunday afternoon football.

A handful of successful initial public offerings of stock -- from fruit maker Dole Food Co. to retail chain Vitamin Shoppe -- had experts predicting that a resurgence in the IPO market was just around the corner, following a two-year slump.

But the pundits proved about as reliable as Brett Favre in the final two minutes of a playoff game. The much-touted IPO boomlet lasted just a few months before fear and uncertainty -- this time, triggered by the possibility of Greece's debt default -- once again set in.

Only 18 companies have gone public on a U.S. exchange so far this year -- well below historic norms. Another nine companies, including the publisher of Penthouse magazine and JBS SA, the world's biggest beef producer, have delayed or withdrawn their IPOs since the start of the year, according to Dealogic, a financial research firm.

In Minnesota, only one company -- medical device maker AGA Medical Holdings of Plymouth -- has gone public since the end of 2007.

The market for IPOs, a vital source of capital for growing companies and a key barometer of investors' appetite for risk, has been in a rut for so long that some experts are now wondering if something more than just market uncertainty is to blame. After all, the S&P 500 stock index last year staged its biggest one-year gain in six years -- with some large-company stocks more than doubling in value. Normally, a buoyant stock market is fertile ground for IPOs.

But the dearth of IPOs might have less to do with market cycles than with structural change on Wall Street, some experts argue. Over the past decade, consolidation among middle-market investment banks -- and the disappearance of such firms as Alex Brown & Sons, Hambrecht & Quist and Montgomery Securities -- has reduced the number of firms that underwrite offerings and pitch the stock to investors. The IPO market is now dominated by the so-called "bulge bracket" firms, giants such as Goldman Sachs, J.P. Morgan and Morgan Stanley, that shy away from the sort of small, venture-backed companies that once fueled new offerings.

Jon Salveson, head of investment banking at Minneapolis-based Piper Jaffray & Co., said even companies that are ready to issue stock are becoming "orphans" -- that is, public companies largely forgotten by institutional investors because no Wall Street firm researches them or trades their stock.

"If you're a $500 million market-cap company, you're a pretty big deal. But you know what? On Wall Street, you're nothing," Salveson said. "No one will speak about you, no one will know who you are. ... That's where the bottleneck is."

Companies that went public in 2008 actually have seen their average share prices decline 3.64 percent, despite a broad rally in the stock market, according to Dealogic.

New trend: Going private

For now, the public markets appear to be operating in reverse.

Not only are fewer companies going public than is normal during a market rebound, a number of public companies are taking themselves private. Gander Mountain, the St. Paul-based outdoor goods retailer, took itself private late last year. And Zareba Systems, a Plymouth-based maker of electronic fences, recently was bought by a larger Pennsylvania corporation. Both companies had fallen off the radar screen of investment banks, and decided they were better off as private entities.

"Once they don't fit the profile of a public company, they're in never-never land," said Brian Holcomb, managing director at Greene, Holcomb & Fisher, a Minneapolis-based investment bank. "No one will follow them, but they're probably paying half a million dollars a year to comply with Sarbanes-Oxley," the 2003 law that imposed additional reporting requirements on public companies.

Few people advocate a return to the sort of giddy IPO market of the late 1990s, when a slew of Internet and telecom stocks with little chance of long-term profitability hit the market. All told, 996 companies went public in 1999 and 2000, nearly as many as went public over the next five years combined. A number of these companies disappeared in the aftermath of the dot-com crash.

Yet the pendulum might have swung too far the other way, some bankers fear. Without a robust IPO market, venture capital firms will be less likely to sink money into startups. Indeed, a closer look at last year's public offerings reveals a startling lack of venture-backed deals. About half the IPOs came from firms backed by private equity firms, which in many cases needed the money to pay down debt incurred during the leveraged buyout boom earlier in the decade.

"We're seeing a paradigm shift, where earlier and riskier companies that would have gone public say, three years ago, are staying private," said Rajesh Aggarwal, a finance professor at the University of Minnesota's Carlson School of Management. "You're going to see capital markets a little more staid."

Over time, continued weakness in the IPO market will "grind on the gears of innovation and growth in the economy," Salveson said. "The IPO market is a blinking red light that says, 'Is capital formation working for new ideas in the U.S.?'"

But as investment bankers can attest, the market for new offerings can turn on a dime. A series of positive earnings announcements, and another sharp rise in the stock market, can compel a number of companies to dust off their IPO pitch books. Already, the backlog of companies waiting to go public is piling up. According to Dealogic, 77 companies have registered to go public, compared with 21 at the same point a year ago.

Piper Jaffray is registered as an underwriter on 14 of these IPOs, which ranks the firm third in the nation (behind only Goldman Sachs and J.P. Morgan) in terms of public offerings in the pipeline.

All it takes is a handful of well-priced IPOs to turn things around, Salveson said.

"It's a momentum market," he said. "The most important factor in the pricing of your IPO is last night's IPO."

Chris Serres • 612-673-4308