Initial public offerings roared back to life in October after one of the weakest quarters in years.

In all, 25 companies issued stock for the first time last month, the most since August 2005, according to research firm Dealogic. This follows the slowest quarter for IPOs since 2003. On average, stocks debuting in October gained 14% in their first day of trading, the best showing in nearly a year.

In part, October's surge is seasonal. Bankers and venture capitalists take soon-to-be-public companies on "road shows" in September after summer vacations.

But the key factor is that the stock market rally in September and October revived interest for IPOs.

With a bevy of big debuts this month, the performance of IPOs and stocks overall likely will determine if IPOs will carry their momentum into 2007.

October's IPOs came from a range of industries. Property manager Douglas Emmett and tech services giant SAIC topped the charts by raising $1.6 billion and $1.3billion, respectively.

Financial services and oil and gas continued their yearlong strength with IPOs of Western Union, specialty insurer First Mercury and natural gas transporter Eagle Rock Energy Partners.

A slew of health care and biotech firms came to market, including heart-device maker LeMaitre Vascular and eHealth, an online clearinghouse for health insurance. Analysts say an aging global population is whetting investor appetite for health care companies.

The tech sector benefited from expectations that companies will spend more on information systems and that a mobile video craze will ignite demand for wireless gadgets and related infrastructure.

Optium Corp., which makes cable TV transmission devices, priced its IPO at $17.50 a share, above the expected $13.50 to $15.50. Shares jumped 9% in their first day of trading, but have since slumped back to just over the offering price.

October's IPO rally surprised analysts because it followed a weak third quarter in which there were just 40 IPOs, down 43% from third-quarter 2005. The rocky equity markets this summer scuttled 20 IPOs, including a $550 million planned offering from Halliburton's Kellogg Brown & Root unit.

The third quarter was particularly harsh for venture-backed startups. Just eight venture-funded firms went public from July to September, down from 19 in the same period last year and 24 in the third quarter of 2004.

Almost 90% of venture-funded companies are choosing to be acquired rather than go public, said Mark Heesen, president of the National Venture Capital Association.

Venture capitalists typically prefer lucrative IPOs, which offset losses from investments that don't pan out. But the shaky equity market all but closed the window for IPOs.

Also, buyout terms have been favorable, as highlighted by Google's recent $1.65billion deal to buy video Web site YouTube.

What's more, acquisitions let entrepreneurs avoid rigorous Sarbanes-Oxley financial reporting requirements, stricter standards for director independence and other legal liabilities.

"For a while it seemed like 2006 couldn't have gotten much worse," Heesen said. "October offered a welcome sign that there's some life in the IPO market."

"The question that remains unanswered" is whether a preference for the safer, but lower returns, of acquisitions will limit the number of startups venture capitalists can fund, Heesen said. If the IPO market weakens, acquirers will be able to negotiate tougher deals, further depressing venture capital returns.

This could hurt the U.S. economy. Venture-backed firms spend more on research and development, boost sales more quickly than larger peers and account for more than 9% of private sector jobs, said research firm Global Insight. When acquired, they often lose their "entrepreneurial zeal," Heesen said.

A resurgence of IPOs may take place overseas, Heesen said. Foreign stock exchanges such as London's Alternative Investment Market are actively courting Silicon Valley startups that are seeking to avoid Sarbanes-Oxley.

November will host nearly back-to-back IPOs of the commodities market New York Mercantile Exchange, Halliburton's KBR unit and auto rental chain Hertz.

"The calendar is loaded for November," said Sal Morreale, who tracks IPOs for Cantor Fitzgerald. "But I would say investors are still very cautious because if market conditions deteriorate, the IPO market will mirror that action and fewer deals will get done."

Copyright 2006 Investor's Business Daily, Inc.

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