Not every company that jumped into the waters of the Israeli financial markets swam in May. But it was an extraordinary month nonetheless, for sheer volume of offerings.

More than 25 newcomers tempted the Israeli investor, hoping for a piece of their pocket.

Six new companies joined the Tel Aviv Stock Exchange and 17 more completed the institutional phase of their offerings, and await the Israel Securities Authority's approval to proceed onto the public phase.

Another three offerings are scheduled for next week. Monday is the last day on which they can tap investors based on their 2006 results; after that, they'll have to write their prospectuses based on their results for the first quarter of 2007 as well.

Some mean to have another stab at the institutional phase, having flopped the first time around.

Assuming that the companies that passed the institutional phase, securing pledges for 80% of their offerings, will pass the lower hurdle of the public phase, then 25 companies will have joined the TASE in May, compared with 15 in the whole of the first quarter.

The companies raised more than NIS 3 billion in May, of which NIS 1.4 billion was scored by selling shares. In the first quarter, the companies raised about NIS 7 billion, but that included the gigantic NIS 6 billion offering of Oil Refineries. Without that, the companies raised just NIS 980 million together.

However, the flood of offerings brought some warts to light. One is the quality of the companies tapping investors for money: Not a few hit the market with deficits in their shareholders equity, going-concern warnings, and losses. Some had no revenues at all.

Try, try again

Looking more closely at developments, it turns out that institutional investors lost money on almost all the initial public offerings in which they participated. That made them wary and few of the newcomers managed to wrap up the institutional phase of their offerings on the same day they began them. They therefore had to hold another tenders, with changes to the original offering structure; cutting back the shares component, or significantly lowering the company valuation they sought to achieve.

These included big companies like Clal Biotechnology and the real estate firm Ashdar, and several small ones such as PMS, also a real estate company; the Hamama brothers (seeds, spices, coffee, snacks), and Laser Direct Systems.

In some cases, even glittery names behind them couldn't help, such as the factoring company Peninsula Financing, behind which stands Arie Ovadia as chairman.

The underwriters hate being unable to complete the institutional phase of offerings: they have to sweeten the incentive for investors, and the more that happens, the more the institutional investors must wonder why bother to get involved in the first phase, if they'll get better terms down the line.

The real test

Yet the underwriters seem blithe about the troubles they encountered during May: they'd rather focus on the half-full cup, which is simply the sheer number of offerings this month.

Leader Capital Markets manager Danny Barak says the secondary market is in its best shape in years, and it's supplying ideal conditions for the IPOs market.

The only problem is that the gigantic volume of offerings was greater than the market's ability to control them, and therefore, some companies had to radically amend their terms because of the over-supply. In some cases, the pricing had been wrong to begin with, Barak admits. "The underlying conditions in the market haven't changed, and the investment banks are still seeing an impressive influx of money," he argues.

Eliav Bar-Dor of IBI also says this is the best time in history for Israel's primary market. If anything he believes the difficulties show that the market is maturing. "The over-supply in the IPOs market led to selectivity, which is healthy," he says.

In fact now comes the real test, argues Tzahi Sultan of Clal Underwriting. "In May the IPO market set a new record, and now the real test of the underwriters is whether investors will make money from these offerings," he says. "If they don't, it will be very hard to operate in the IPO market. They'll prefer to buy the merchandise after it hits the market."