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Some new IPOs lack stability

Mitchell Hartman Nov 23, 2010

Some new IPOs lack stability

Mitchell Hartman Nov 23, 2010


Tess Vigeland: Just in time for the holiday shopping season, J. Crew is having a rare sale! Not of cashmere sweaters, but of itself.

Two private-equity firms are buying the retailer for $3 billion. And there’s a sense of deja vu to the deal. A group led by TPG Capital took the company private back in 1997. Then it went public in 2006. But apparently it has an easy return policy, because TPG is leading the most recent buyout. It and other firms like it have also been doing deals in the other direction, issuing stock in initial public offerings.

But as Marketplace’s Mitchell Hartman reports, not all of these deals made it to the cash register.

Mitchell Hartman: First, you have to know this is a very good time for IPOs. Recent ones include GM and the consulting firm Booz Allen Hamilton; Toys”R”Us and the hospital chain HCA are in the pipeline.

Darren Fabric: The capital markets are open for business.

Darren Fabric at IPOX Capital Management runs a mutual fund devoted to IPOs. He says many are companies that were taken private in deals loaded with debt. Now, the private equity firms are trying to cash out.

Fabric: There’s money available for these companies to go public, and if there’s a growth story behind these companies without a lot of overhang of debt, like you saw with Harrah’s Entertainment, there will be appetite for those types of companies.

He mentioned Harrah’s casinos — it’s another buyout by TPG Capital, which is leading the purchase of J. Crew. Harrah’s was supposed to go public last week. But investors weren’t impressed and it was pulled. More than 120 companies have done the same thing this year.

Anant Sundram: Many of these firms still have too much debt.

Anant Sundaram teaches finance at Dartmouth. He says often these companies were milked for cash without being turned around. There are economic worries as well.

Sundram: People want to see that consumer demand, GDP growth and so on is picking up substantially before putting their money into these very large firms.

Fund manager Darren Fabric says these older companies are also in mature markets.

Fabric: The growth prospects of a private-equity company are usually a lot less than a venture capital deal.

Fabric says investors would just as soon take a flyer on a promising technology startup that could become the next Amazon or Google, rather than a casino company with tons of competition on the Strip.

I’m Mitchell Hartman for Marketplace.

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