There were three IPOs in September, one each on the TSE Mothers, OSE Hercules and JASDAQ markets. Thus far in 2008, there have been 32 IPOs: 11 on JASDAQ, 9 on TSE Mothers, 6 on OSE Hercules, 3 on the TSE 2nd section, and one each on the Nagoya Centrex, Sapporo Ambitious and JASDAQ NEO markets.

Let’s begin by taking a look at how this year’s IPO stocks have performed. For all 32 IPOs thus far in 2008, opening prices were an average of 25.7% higher than the offering prices. But as of September 30, the market prices of these 32 stocks were 6.8% below the offering prices. That means prices of the 32 stocks dropped an average of about 30% after trading began. For the 121 IPO stocks of 2007, opening prices were 49.6% higher than the offering prices on average. By September 30, though, the prices of these 121 stocks had dropped to 42.3% below the offering prices on average.

The difference between the offering and market prices of the 32 IPOs stocks of 2008 has changed from month to month. As you can see, the three companies that listed on the TSE 2nd section have performed the worst by far. Prices of the nine IPO stocks on the TSE Mothers market, on the other hand, were an average of 37.3% higher than their offering prices at the end of September. This is almost exactly the opposite of the performance of the three TSE 2nd section stocks. But investors should note that the prices of all 32 stocks have been declining relative to their offering prices.

The same is true of the 2007 IPOs. Market prices relative to offering prices have been generally declining from month to month. Despite this poor performance, the prices of companies on the TSE Mothers market are holding up extremely well. As of September 30, 2008, the average market price of TSE Mothers 2007 IPO stocks was still higher than the average offering price.

In 2008, the average amount procured per offering fell to the lowest point in the past decade. Furthermore, excluding the three companies that listed on the TSE 2nd section and Seven Bank, which listed on JASDAQ, the average amount procured by the remaining 28 IPO companies in 2008 was only ¥759 million.

Even for the smallest publicly owned companies, annual expenses for maintaining a stock exchange listing are at least ¥50 million. For a small company that uses an IPO to procure only about ¥700 million, this annual expense is huge. The high cost of public ownership prevents the IPO from fulfilling its primary role: providing companies with a source of low-cost capital. Nevertheless, companies are still deciding to conduct an IPO. Why? The only explanation is that there an IPO provides benefits other than simply gaining direct access to capital markets.

For companies that require funds to continue growing, an IPO can significantly cut the cost of indirect fund procurement (loans) by earning the company a higher credit rating from banks. In addition, company presidents often tell me that public ownership makes it easier to recruit new college graduates. An IPO thus offers benefits associated with two of three resources needed to operate a business: people, capital and equipment. Obviously, the appeal of an IPO is not limited to procuring funds from the stock market.

For the last three months of 2008, eight companies have already received approval for an IPO. One offering is fairly large. Linical Corp. plans to procure more than ¥2 billion through a public offering and secondary offering on October 27, listing its shares on the TSE Mothers market. The other seven offerings will each be approximately ¥1 billion or less, having very little impact on market supply-demand dynamics. But the three September IPOs apparently disrupted the supply-demand balance. After trading began, these stocks have been attracting very few buyers. Since individuals are the primary buyers of IPO stocks, I think we can say that these price declines demonstrate that the buying power of individual investors has weakened considerably.

In terms of valuations, the eight companies planning on an IPO in October and November expect to sell their shares at an average PER of 12.2 relative to their projected earnings. Two of the eight companies, Linical and Tri-Wall, will start with double-digit PERs. The other six will be sold at single-digit PERs. All of these multiples are extremely low valuations. Although investors will have to check the businesses activities and financial performance of these companies for themselves, there may be excellent opportunities among these eight companies.

One concern involving IPOs today is that a company may decide to cancel its offering because of deteriorating market conditions. I have one word of advice for executives who are trying to decide whether or not to go ahead with an IPO. Cancel an IPO only if you are certain your company will never want to go public again. But if you are looking for a good time for an IPO, remember that it is always best to act when you have the opportunity.