| NEW YORK, March 28
NEW YORK, March 28 In the weeks leading up to
the IPO of King Digital Entertainment, the company's
bankers scrambled to persuade investors that the maker of
popular online game "Candy Crush Saga" was more than a one-trick
pony, according to a source familiar with the situation.
As the debut approached this week, the bankers' job only got
harder. On Tuesday, Facebook Inc said it would pay $2
billion for Oculus VR, a two-year-old virtual reality startup
that has yet to put a product on the market. Facebook CEO Mark
Zuckerberg described the deal as the social media giant's desire
to bet on "the platforms of tomorrow."
But for some investors, the deal brought back memories of
the Internet boom and bust in 1998-2001, where profitability and
other financial fundamentals of companies took the back seat to
a raging fad about anything with a dotcom identity, according to
Bankers underwriting King Digital's offering had to call in
favors with investors who had received large allocations in
previous successful IPOs, the source said. As a result, King
Digital priced the offering at the mid-point of its range of $21
to $24. But its shares tanked in Wednesday's debut, falling 16
percent and fell further on Thursday and Friday. King Digital
could not be reached immediately for comment.
Wall Street bankers are now looking at the disappointing
opening as a sign that investors are getting more cautious about
the IPO market, especially when it comes to technology and
biotechnology stocks. Although bankers said companies waiting in
the wings so far seemed to want to forge ahead with their IPO
plans, the realization is likely to moderate expectations on the
size of offerings and valuations.
"You realize that people are going to be a little bit more
cautious. You realize that the valuation needs to be reflective
of that cautiousness," said Sam Kendall, global head of equity
capital markets at UBS AG.
That would mark a sharp turning point for the IPO market, in
which investors have been fed a steady diet of new public
offerings this year from companies yet to turn a profit. More
than 50 IPOs have priced in 2014, and two-thirds of those are
unprofitable, according to Renaissance Capital, an IPO
investment advisor. [ID: nL1N0MP073]
Still, companies that have gone public this year have seen
their shares rise 33 percent on average from their offer prices,
according to Dealogic.
"The market has gotten ahead of itself, and you're seeing a
pause in speculation, especially for biotech and some of these
new tech names," said Eric Green, senior portfolio manager and
director of research at Penn Capital Management in Philadelphia,
which oversees $7.5 billion.
"Other issues, like Ukraine or whatever, end up being an
excuse to take money off the table, but the fundamentals behind
these companies haven't changed, just the valuations over them.
Those are coming back to earth," he added.
The next test for the market could come as early as next
week, when a series of technology companies are due to list,
including online food delivery service Grubhub.com, healthcare
IT company IMS health, and software maker Five9.
Bankers said the investor caution is more of a correction
rather than a sign that the market was shutting down for new
While investor worries about frothy valuations is giving
pause to some companies in the technology and biotech sectors,
companies in other industries are still forging ahead, betting
that there will be enough demand for their stock.
In financial services, for example, the U.S. Treasury
announced plans to sell nearly 23 percent of Ally Financial Inc
through an initial public offering to raise as much as $2.66
One source familiar with the situation said by buying Ally
investors would pay for "a value story," unlike "the growth
story" sold in technology and biotech IPOs.
Still, both the Treasury and Ally would have liked to be
able to sell the entire government stake in the bank in one go,
sources have previously said. The Treasury will still be left
with a stake in the bailed-out bank after the IPO.
A spokesman for the U.S. Treasury and a spokeswoman for Ally
declined to comment.
Separately, sources familiar with the matter said on
Thursday that aircraft lessor Avolon was preparing for an IPO
this year as it looked to take advantage of a recent boom in
aircraft finance, driven by an expectation that air travel will
continue to grow. [ID: nL5N0MO5G3]
Even in the technology sector, bankers said companies such
as Alibaba Group Holding Ltd, the Chinese e-commerce company,
are likely to find sufficient demand when they come to market.
Alibaba is expected to file for a listing in the United
States as early as April with IPO proceeds that could exceed $15
"All kinds of industries have been represented in IPOs, but
it's the splashy Internet ones that have been in the news," said
John Carey, portfolio manager at Pioneer Investment Management
in Boston, which has about $220 billion in assets under
"People are exercising caution, and I'd be more concerned if
they were willing to pay anything at all," Carey added. "If
demand was robust for anything that came down the pike, that
would trouble me."
(Additional reporting by Peter Rudegeair and Ryan Vlastelica;
Editing by Paritosh Bansal, Martin Howell)