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Déjà vu all over again:
But if there’s one IPO you should get into this year, this is it
by Siu-Yee Ng
A decade’s gone by and it doesn’t seem like anything has changed. We have a Bush in the White House. Tax cuts are high on the agenda. Japan’s economy is tanking. The market is crashing. Growth is slow and oil prices are high.
But one thing is different. Today, investors rather than government regulators are imposing discipline on stock market valuations run afoul of reason. The NASDAQ has hit lows unseen since the Asian crisis.
Funny that should come up....
Because at this point it seems like there’s another Asian crisis brewing. This time it’s more political than financial. Although the flap over the “spy plane” has been resolved, the general souring of relations between the Chinese and the United States has many investors worried.
To make things even worse, market heavyweights continue to disappoint. Charles Schwab (SCH:NYSE), the largest discount and online brokerage, recently announced layoffs. It goes without saying that Schwab will not meet analysts’ quarterly expectations.
Oracle (ORCL:NASDAQ) and Compaq (CPQ:NYSE) had already announced earnings shortfalls. It’s not so much the earnings warnings that are spooking investors, but the future outlook for the companies.
In the fourth quarter of 2000, although many companies predicted weaknesses for the first two quarters of 2001, they predicted that earnings would improve thereafter. But that’s not the case. Companies are getting rid of inventory at discounted prices. This will cut into their bottom lines, and revenues will most likely grow at a much slower rate.
As a result, investors have grown wary of disappointments and are staying away from these stocks.
More turmoil
The IPO market is still in hibernation mode. In the first quarter of 2000, 135 stock debuts raised a total of US$28.5 billion dollars. In the fourth quarter of 2000, 56 IPOs raising a paltry US$15.1 billion. And if you though that was bad, the first quarter of 2001 practically shut down the new issues market, with a mere 21 IPOs raising a miserly US$8.5 billion.
The IPO market lives and dies by the NASDAQ. With the NASDAQ stuck far up Bear Creek, we’re seeing little action in the IPO market.
But here’s the good news: the bear market will eventually end. The question is, when? The NASDAQ has to regain lost ground before the IPO market can recover.
We know that the NASDAQ has been in bear territory for the past twelve months. But bear markets follow a pattern. There’s the initial fall, followed by a rally, followed by total capitulation and despondency as panicked shareholders sell everything. And according to Dow Theory, it takes an average of 18 months for a bear market to end.
Newton’s law
According to Newton’s Third Law of Motion, for every action there is an equal and opposite reaction. Sounds to me like the NASDAQ is following this very same law.
The market has been trying to rally. But every time there’s a big recovery, it is immediately followed by a market selloff.
These rallies are most likely triggered by short-term traders itching to get back into the beaten-down market. Most of the upside moves still look like swing trading opportunities, where investors choose to sell into strength instead of holding.
The real catalyst for the market is earnings visibility. When earnings improve, so will stock prices. Until then, IPOs will lag behind the overall market.
One to go
IPO withdrawals still triple that of debuts. But there is one IPO that I am keeping a close eye on.
I recently introduced a friend to “real” Chinese movies. Subtitled, of course. In one flick, millions of dollars were won and lost in a single poker game. The pot gets juicier when the players decide to bet their hands. Not their hands of cards, you understand: their actual hands. Fingers and all. If the gambler loses the bet, off goes his hand.
My first thought was: why not insure their hands? After all, Jennifer Lopez insured her ample billion-dollar derriere.
People’s need to protect their assets makes insurance a billion-dollar industry. And I’ll tell you in a minute how you can make money on an American revolution called demutualization.
Demutualization is the process of converting a mutual insurance company into a stock company. As the insurance industry consolidates, mutual insurance companies have begun look for better ways to expand their business. The have started raising equity capital as well as undertaking acquisitions or strategic alliances.
Reorganizing a mutual holding company enables it to raise equity capital and also offer stock as a way to finance acquisitions. New York passed a demutualization statute in 1988, which has served as a model in other states. The demutualization process involves converting a mutual life insurance company owned by policyholders into a life insurance company owned by shareholders. Essentially, eligible policyholders receive either cash or shares in exchange for changes to their ownership rights in the company. This requires approval from policyholders.
The trend toward demutualization is accelerating. And now is the time to get in on the action.
Winning hand
With the financial services world getting rocky, The Prudential Insurance Company of America has unveiled plans to demutualize. And this is your chance to profit from the change.
The new holding company will be named Prudential Financial.
The #1 U.S. life insurer (ahead of Metropolitan Life) and one of the top insurers worldwide, Prudential offers individual and group life insurance, employee benefits services, and annuities.
Other operations include individual property/casualty lines, real estate brokerage, relocation services, asset management, brokerage, and other investment products and services. Prudential has operations in Asia, Europe, and North and South America.
As of December 31, 2000, Prudential had US$20.6 billion in equity and US$272.8 billion in assets. In 2000, its revenues were US$26.5 billion and its net income was US$398 million.
This IPO will be one of the biggest in history. Prudential plans to sell 89 million shares at US$43.70 in the public market in the fourth quarter of 2001. It will also distribute about 454.6 million shares to its approximately 11 million eligible policyholders.
Prudential will also sell 2 million class B shares to institutions in a private sale. And it reserves the option to sell a further 13.35 million shares in case the IPO is oversubscribed.
The IPO is being lead-managed by Goldman Sachs.
You can see why I’m keeping a close eye on this one! The company is financially stable and a market leader.
I expect Prudential’s IPO to be the strongest of the year. If you’re looking at a possible aftermarket buy, wait for the dust to settle before getting in.
Contact: The Prudential Insurance Company of America, 751 Broad Street, Newark, NJ 07102-3777, tel. 973-802-6000, fax 973-367-6476, Internet www.prudential.com.
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