The worst-kept secret in the independent broker-dealer world, an LPL Financial initial public offering, is now official. The company filed an S-1 with the SEC in June. But after months of speculation, observers are wondering: why now? With volatility reigning once again in the stock market, how will this new stock be received? The company seems to have two main options, and each carries its own set of questions, say market observers. It could decide to postpone the deal and wait for calmer conditions-or it could plow ahead for fear that things will only get worse in the coming months.

Indeed, the current state of the IPO market is not enticing. So far this year, through June 25, 70 deals have been cancelled or postponed, according to Thomson Reuters-sometimes at the last minute-as companies have realized investor appetite was feeble. And many of the companies that were able to complete their deals had to settle for less money-sometimes as much as 20% to 30% less-than they originally sought. Of the 64 companies to go public this year, through July 15, nine have dropped 8% from their offering price, according to data from Renaissance Capital, an IPO research firm. The S&P 500 dropped 3.3% in that time. The FTSE Renaissance Capital IPO Index, which tracks the performance of all companies that went public in the last two years, has shed 2.6% in the year, to July 9. The S&P dropped 4%.

On the other hand, things can always get worse. In fact, the outlook for the broader stock market is distinctly gloomy, with some market observers calling for tough times over the next year or so. And if that happens, the possibility for doing any sort of IPO may evaporate.

"What's going on now is a lot of people are racing to get deals done in the next six to 12 months because of the uncertainty in the broader markets," says Morningstar IPO Strategist Bill Buhr. He noted that when equity markets were flailing from the fall of 2008 to March 2009, the IPO market basically shut down.

CHALLENGES AHEAD

Given all the obstacles, why go public now? Some observers suggest that LPL was merely starting the paperwork process, and could afford to sit and wait for a calmer market. The actual filing did not say much in terms of timing. It also did not specify how LPL intends to use the $600 million it seeks-but observers note that it could possibly retire some of its $1.4 billion in outstanding debt. Going public should also help provide an exit strategy for the two private equity firms that together hold a 60% stake in the company: Hellman & Friedman, and Texas Pacific Group. LPL declined comment, citing the quiet period mandated by the SEC.

Some analysts say investors should be cautious when private equity companies hold a piece of an IPO. "To me it's a red flag if a private equity shop is selling you their shares," Buhr says. "You're becoming their exit strategy, and in a lot of cases you have no idea what they did with the company while they had it." His colleague, Morningstar IPO analyst Michael Gaiden, says the company had not paid out any dividends to shareholders in the last three years, indicating that its large debt burden is the result of acquisitions.

But Gaiden also says that LPL is not as attractive as other companies in the pipeline. "The firm struggles to meet its return on invested capital and operates with an undifferentiated product in a very competitive market," two key metrics Morningstar looks at before making a recommendation to clients, he said. At press time he had not yet set his firm's rating, but said he was not going to give it the highest rating, "high interest."

BIG BACKERS

Still, the company does seem to have the confidence of the establishment. David Menlow, president of research firm IPOfinancial.com, noted that four top investment banks on Wall Street are underwriting the offering, with Goldman Sachs co-lead managing with Morgan Stanley, along with Bank of America Merrill Lynch and JP Morgan Chase & Co. "It could be a sign that a lot of perceived strength is behind the company," he says.

Analysts say it is difficult to find pure comparisons for LPL in the public market, but that it is closer to technology-centered firms than pure-play brokerages. "Given that LPL primarily competes on the quality of its services that are very technology-based, I think of this as a standalone service offering," Gaiden says. "It's more transaction-oriented versus a pure-play brokerage house, where the quality of the research, the depth and breadth of the advisory staff, and client service levels have more of an impact on the business." Gaiden adds that LPL, unike Fidelity and Schwab, operates more in the transactional trading, processing and clearing space. "LPL serves institutions, whereas those other firms serve individual clients," he says.