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Investors find IPO markets full of land mines

The hype over the General Motors Co. offering last week may lead investors to think the market for initial public offerings is returning to its healthy, pre-crash past where nearly every new issue rewarded early investors with big gains.

In fact, 2010 has offered a mixed bag of North American initial public offerings. The risks involved in buying IPOs have been particularly evident here in Canada, where a handful of high-profile disasters have outweighed a very small number of success stories.

In the United States, there are a number of winners. But a look at the top performers reveals that many of the hottest "U.S." offerings are actually Chinese or Indian companies that have chosen to list on a U.S. exchange.

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The moral here is that investors can most easily find the hot growth stories on another continent.

In the aggregate, says Neil Manji, national IPO practice leader of PricewaterhouseCoopers, Canadian IPOs will total about $5-billion this year, more than the $4-billion Mr. Manji hoped for coming into 2010, but below the $6-billion-a-year average of the past decade.

An investor who had bought a cross-section of those IPOs would have had mediocre results. According to Bloomberg, just 11 of 31 IPOs on the Toronto Stock Exchange have posted double-digit gains from their offering price through Friday's trading. Ten have been money-losers, including Athabasca Oil Sands the biggest offering of the year by a factor of nearly two.

Athabasca, which raised more than $1.3-billion in March, has lost more than one-third of its offering value, ranking it last among IPOs on the TSX.

Worse, however, are Ottawa's Mitel Networks and Calgary's SMART Technologies each of which has shed nearly half their value since their offerings in April and July, respectively. Both chose to list their shares in the U.S. on the Nasdaq Stock Market and have the ignominious distinction of being two of the five worst-performing IPOs this year on any U.S. exchange.

SMART Technologies, a maker of electronic whiteboards, missed expectations in just its second quarterly earnings report out of the box. Management then shaved nearly 10 per cent from its sales guidance for the current fiscal year. Barron's, the weekly U.S. investing newspaper, headlined its news story on that announcement "SMART Investors Feeling Stupid." Its stock slid from its IPO price of $17 (U.S.) to $8.83.

Similarly, Mitel Networks, a provider of communications systems to business, missed its revenue number for the quarter ended July 31. Executive turnover soon followed. The president of its U.S. division resigned in August and its CEO resigned abruptly in September. It slid from an IPO price of $14 to $7.09.

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Just as Canada is providing some of the worst U.S. IPOs, other countries are providing some of Canada's best. The top IPO on the TSX is the tiny Australian company, Ratel Gold which raised about $14-million (Canadian) in August and is up nearly 650 per cent, from 20 cents per share to about $1.50.

The top Canadian IPO on the Canadian exchanges is Calgary's Secure Energy up roughly 72 per cent from its $66-million April offering. The third-best TSX IPO, Tahoe Resources is a Reno, Nev.-based company. It's up nearly 70 per cent after raising $383-million in June.

U.S. IPOs have had a much more impressive year. According to Renaissance Capital, a Greenwich, Conn., investment firm, there have been 130 IPOs priced, a 136-per-cent increase from 2009, and total proceeds of $34.9-billion (U.S.) are up 76 per cent from the prior year. The average IPO has returned 19.3 per cent from its offer price.

Yet the numbers do not reflect a gangbusters market for companies based in the United States. According to Bloomberg data, five of the top 10 "U.S." IPOs are non-U.S. companies, including four from China and one from India. Of the 31 IPOs up 50 per cent or more from their offering prices, 15 are foreign, including 12 from China.

While that certainly reflects the faddish chase for Chinese growth, IPO analyst Francis Gaskins of says there are more substantive reasons as well.

"A lot of the Chinese companies have higher profit margins than the U.S., and they generally have better balance sheets, because they haven't been debt-leveraged," Mr. Gaskins said. "It's hard to find a U.S. company that isn't debt-leveraged."

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In addition, "the markets [in emerging economies]are not as clearly defined as the U.S., so there's a competition for the market leadership. In the U.S., it's hard to find niches with a good growth rate."

Mr. Gaskins says debt-burdened or unprofitable companies are still having trouble going public on U.S. markets. "Investors have sharp pencils nowadays; you can't pull the wool over their eyes," he said.

Special to The Globe and Mail

For better or for worse: Going public in 2010*


Ratel Gold Ltd., +650 per cent: The Australian miner has benefited from a rise from 20 cents per share to $1.50.

Secure Energy Services Inc., +72 per cent: This provider of services to oil and gas companies is the only purely Canadian company among the TSX's top three 2010 IPOs.

Tahoe Resources Inc., +70 per cent: A Reno, Nevada company that raised $383 million in June to help fund its Guatemalan silver mine.


Athabasca Oil Sands Corp.: -36 per cent: The heavily-hyped Canadian mega-offering has become the worst IPO on the TSX this year.

SMART Technologies Inc: -48 per cent: The Calgary maker of whiteboards listed in the U.S. and quickly disappointed with its revenue outlook.

Mitel Networks Corp., -49 per cent: The Ottawa-based maker of communications products also listed in the U.S., and also missed projections. Its CEO has resigned.

* From offering price to Nov. 19 close. Source: Bloomberg

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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