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Look, I know we've been starved for IPOs... but this is ridiculous! Today was the debut of (CYOU) a Chinese website portal spun-off (SOHU). Changyou is a recently launched MMORPG (massive multi-player online role playing game) much like "World of Warcraft".

You'd think we're back to the Tech Bubble era where companies would slap a dot com after their name, have one product or service related to the internet and float shares... and watch them soar into the stratosphere.

changyou IPO intraday chart

CYOU shares received healthy demand and priced in the upper range ($14 to $16) and popped at the open. Unless you were able to get your hands on an allocation, you missed the +25% one day gain. The difference between this IPO and the Tech Bubble IPOs is that Changyou actually makes money and is a "growth" story. It was priced at around 6.5 times earnings to make it palatable because keep in mind, it is based on only one product - within the very fickle entertainment/gaming sector.

Personally, I wouldn't touch CYOU with a barge pole (as an investment) but after the regulatory IPO period is over, it might be a great short (akin to other one product wonders like Crocs).

The last real IPO in the US was Mead Johnson (MJN), another spin-off - from Bristol-Myers Squibb (BMY). It didn't open the flood gates of initial public offerings, as many thought, and has traded sideways. The lack of IPOs is not only indicative of a very sick stock market, it is no fun. The only silver lining around this cloud is that, in the long term, the kind of IPO drought that we're seeing now, characterizes generational lows. Take a look at the long term historical chart of IPOs going back to the 1970's.

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I know that the IPO market activity is a contrarian indicator for the stock market but this is ridiculous! The present public issuance market is the worst we've seen since the vicious bear market of the 1970's.

The last IPO to grace us was Grand Canyon Education (LOPE) back in November 20th, 2008. Before that, we had Rackspace Hosting (RAX) on August 8th, 2008 and China Mass Media (CMM) on August 4th, 2008. Can you believe for the whole year, we only had 20 IPOs?

According to the National Venture Capital Association (NVCA), venture capitalists are bracing themselves for a very tough year in 2009. Please join me in a moment of silence for the poor Patek-Philippe wearing, Veuve-Clicquot sipping VC who won't be able to flip his holdings to Mom'n'Pop for the usual 10 bagger. Most of them expect the IPO market to thaw sometime next year; but 92% of VC's surveyed said they expect a slowdown in investments with 61% believing that the slow down would be more than 10% compared to last year, and cause funding to fall to $27 billion for the year.

The Obama adiministration's stimulus package may become the main theme of IPOs for the remainder of the year as investment banks try to ride the wave of infrastructure plays. But right now, there are a couple of IPOs coming down the pipeline already, hinting that we may be starting to see some action soon:

  • O'Gara (OGAR) - a homeland security play
  • Mead Johnson (MJN) - infant nutrition [spin-off from Bristol-Myers Squibb (BMS)]
  • Medidata Solutions (MDSO) - biotech consulting firm

Believe it or not, I can still remember a time when traders had the luxury of predominantly trading IPOs and spin-offs!

Here's an interactive chart (use the slider to zoom in) showing historical annual data for the number of IPOs :
Continue reading 'Will The IPO Drought End In February 2009?'

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