Stock Market and Initial Public Offerings and Auto Industry and Allison Transmission and Investing and Opinion and Banking & Finance and Remy International and Manufacturing & Technology

Weak market could derail Allison's planned IPO

August 13, 2011

Suddenly, one of the largest initial public offerings ever planned for Indiana doesn’t look like such a sure thing.

Indianapolis-based Allison Transmission in March said it planned to raise $750 million through a public stock sale.

At the time, the company, a maker of automatic transmissions for commercial vehicles, seemed to have a compelling growth story to pitch investors.

In addition to capitalizing on rapid growth in emerging economies like China, Allison—a former General Motors Corp. subsidiary that employs 2,750—expected to ride the crest of the economic rebound in North America and Western Europe.

As Allison noted in its first IPO filing five months ago, production of on-highway commercial vehicles on this continent hit a 20-year low in 2009 but was expected to grow at a compound annual rate topping 20 percent from 2010 to 2013.

But the economic outlook has darkened since then—so much so that on Aug. 9 the Federal Reserve announced it would keep a key interest rate near zero through mid-2013. In its statement, the Fed said growth this year had been “considerably slower” than it expected.

That’s not Allison’s only challenge, said David Menlow, president of New Jersey-based IPOfinancial.com. The recent decline in the stock market—capped by the Dow Jones industrial average’s harrowing 634-point plunge on Aug. 8—has cast uncertainty over what had been a strong IPO market.

For now, he said, the only companies going public are those willing to sell their shares for a substantial discount to what they would have fetched before the market swoon began in July.

Then there’s all the budget wrangling in Washington, D.C. That could put in peril a chunk of Allison’s lucrative military sales—which accounted for $449 million, or 24 percent, of the company’s $1.9 billion in 2010 revenue. Allison is the largest provider of transmissions to the U.S. military.

“If there is going to be a solution to the budget deficit that involves a drastic cutback in defense spending, it may not be as fertile an environment for Allison as previously thought,” Menlow said.

He added: “It’s very clear the company would have numerous obstacles” if it opts to plow ahead with its IPO.

Allison spokeswoman Melissa Sauer declined to comment.

The transmission-maker isn’t the only Hoosier company whose IPO ambitions could get derailed by market conditions or the sputtering economy.

One week after Allison filed for its offering in March, Pendleton-based Remy International Inc. outlined plans for a $100 million IPO.

The company, another GM spinoff, makes starters and alternators. Since coming aboard in 2006, CEO John Weber has transformed the business, chopping its work force by nearly half, to 5,700, and closing 14 facilities worldwide. The overhaul left nearly all the company’s manufacturing in such low-cost countries as Brazil, China and Mexico.

Sales surged from $911 million in 2009 to $1.1 billion last year. Remy said in its first IPO filing that the company’s focus on original-equipment manufacturers, the after-market and remanufacturing—rehabbing used products—helps position it to pocket sales whether the economy is strong or weak.

Still, there’s no substitute for robust demand. As Remy acknowledged in its filing, “Continued weakness or deteriorating conditions in the U.S. or global economy that result in reduction of vehicle production and sales by our customers may harm our business.”

Remy Chief Financial Officer Fred Knechtel could not comment in detail because of SEC restrictions, but said: “We will continue to evaluate the market’s receptiveness to an IPO.”

Other Indiana companies hadn’t yet filed for IPOs but were expected to soon. For example, Bloomberg News reported in June that Angie’s List, the Indianapolis-based provider of consumer reviews, planned to file in August and had hired Bank of America Corp. to lead the deal.

Angie’s List spokeswoman Cheryl Reed declined to comment.

Veteran Indianapolis attorney David Millard said the timing of the recent market upheaval is unfortunate because the state has an abundance of entrepreneurial companies that would be strong candidates for IPOs.

He thinks the IPO market could bounce back within weeks if the market regains its footing. But if the turmoil escalates into a 2008-style market fiasco, the window of opportunity will slam shut.

“Human nature would tell you [investor skittishness] translates into a lack of appetite for IPOs,” said Millard, a partner at Barnes & Thornburg and chairman of its corporate department.

“That is kind of today’s news. The real question is, how long does that last?”•

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