Commentary

Publisher IPO Market Unlikely To Improve Amid Fed Tightening

The market for IPOs of digital publishers isn’t likely to improve this year without stronger signs that investors are willing to take on more risk.

Their risk appetite again will depend on actions by the Federal Reserve, which is more important than other considerations, such as tariffs on foreign-made goods.

The Fed last year raised the target for a key interest rate four times, the first time since 2006 that the central bank had that many hikes in a year. Back then, U.S. economic growth was decelerating on its way to eventual recession, unlike today, which has seen an expansion gain momentum in the past two years.

This time around, the Fed is also letting its vast holdings of Treasury and mortgage debt — acquired during several years of “quantitative easing” — mature without replacing it with fresh bond purchases.

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The central bank wants to have financial resources to alleviate the next recession, but its current policies remove a major source of fresh cash to support stocks.

Statistically speaking, stock-market declines that last two years are somewhat rare. But that’s no reason to expect improvement in 2019.

When I worked at Lehman Brothers, market observers used to express alarm that the U.S. stock market had the audacity to decline for a second straight year in 2001.

“We may never see this again in our lifetimes,” we were assured by in-house experts who pointed to charts that showed the last time stocks fell two years in a row was in the early 1970s. Half of the people in the audience were in elementary school during that era and had no recollection of stagflation or oil-price shocks.

Well, guess what? The market sank for the third straight year in 2002, as the bursting of the dot-com bubble, the 9/11 terrorist attacks and growing threats of war in the Middle East dampened investor enthusiasm.

Last year’s nearly 7% decline in the Dow Jones U.S. Media Sector Total Stock Market Index was mostly in line with the 6.2% drop for the broader S&P 500 Stock Index, the worst performance since 2008.

Much of the decline can be attributed to tech companies that fell out of favor, while traditional media companies were more stable.

Publishers like The New York Times rose 20% last year, its second year of strong gains, even if December was brutal for the stock. The company’s strategy of boosting subscription revenue has helped to lift the publisher’s stock amid greater competition from social media companies for digital ad dollars.

Interpublic Group of Cos. rose 1%, while Omnicom Media Group was flat. Publicis Group lost 16% and WPP Group plunged 41% as longtime CEO Martin Sorrell was forced to depart over behavioral issues.

Media companies, especially younger startups this year, are likely to face more financial pressures as the Fed tightens credit and makes investors more risk-averse.

Two years ago, BuzzFeed was said to be planning an IPO that would have been a key test for the digital publishing industry. The company delayed those plans amid missed sales targets and layoffs.

It’s understandable. No company wants to be the next Snap, going public with grand expectations that are gradually deflated.

2019 will be a key test for many publishers — whether they can continue to build sales and subscription growth that would be more reassuring to potential buyers.

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