When will IPO cool down?

Business world's hot topic of last week was Zynga's IPO, a lack luster one on Friday. Naysayers focused on Zynga's model relying too much on Facebook and ability to hike up revenue.The IPO price is $10/share, although one of the co-founders was able to unload a few hundred million shares at $14/share before the IPO. Zynga's IPO isn't the most exciting one with $1B capitalization (see the shortened list below). It can at most be seen as a rehearsal for Facebook's 2012 IPO. Facebook is estimated to have value at $100B. This number shouldn't be too far away because of the maturity of the secondary markets that allow professional investors to trade equity of private companies efficiently before their IPOs. That is also a simple way for employees and early stage investor to cash in some shares for future deals.

Company IPO price First day performance Market valuation

Zynga $10 -5% $1B

Groupon $20 31% $16B

LinkedIn $45 +171% $8.8B

Pandora $16 $3.3B

Yandex(Russia) $25 $2.4B

We want to understand economical implications from this series of IPOs. The key question, regardless of possible bubbling, would the trend be maintained? To answer this question, we will have to see what inspired the trend.

It is commonly viewed that the Internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. This the fundamental part. As the popularity of Facebook helps significantly Zynga's business, it would not be surprised some companies relying on brand name mobile systems (iPhone, iPad, Android) follow the same suit, if timing is right.

Second, a new breed of rich investors has been keen to back those ideas. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-Internet firms and makers of software apps. In the meanwhile, easy financing may be due to low interest rate around the globe. While overall recovery is stagnant, smart money won't sit at the side line but out to pursuit returns. Funds are not scarce at all from technology to energy. It seems not in the very near future, central banks will tighten their monetary policy, given that the European debt problems. Therefore, the demand side may not subdue soon. Therefore, besides the inflating IPO bubbles, in which investors are desperate on shares, larger companies would definitely seek merger and acquisition route. We have seen a number of them in the past 2 years. For instance, Microsoft had issued debt in 2010 and acquired Skype in 2011. They also extended their interests in Yahoo.

And, third, this boom is much more global than the last one. There are a series of internet IPOs in 2011. The boom is not only in the United States but more global. China and Russia have had exciting IPOs with much higher capital. See the list below. Once the trend is established, it would take a while to break it.

Company Market cap (May 2011)

Baidu $49.7B

Tencent $49.6B

Alibaba $8.9B

Sina $7.7B

Renren $5.8B

Given these driving factors, the European crisis will take toll in global economy. When austerity plans in Europe come in place and the Fed stops pouring cheap money, the IPO may cool down. The cool down may knock down Facebook's capitalization. Smart money sense the day is not that distant so the second quarter of 2012 is the right time. Therefore, our view is that the technological boom will continue. But to be safe, be careful when going into the second half of 2012.