Germany's IPO market stalls as deals are aborted

The IPO market in particular, which raised $7 billion through 39 deals, is at its strongest since the fourth quarter of 2001.

But Germany's IPO market failed to revive this quarter, though it twice threatened to do so in March, despite the apparent strength of investor demand and the success of large new issues elsewhere such as Belgacom's e4 billion deal on March 23, the largest IPO since Orange's in February 2001.

The IPOs of semiconductor maker X-Fab, led by ING, and silicon wafer manufacturer Siltronic, led by Deutsche Bank and Morgan Stanley, were both pulled at the last minute as bookrunners blamed "poor market conditions" attributable to the Madrid bombings and a large fall in the share price of comparable companies.

Bungled execution

The IPO of X-Fab, the former state-owned East German semiconductor maker VEB Mikroelektronik, was poorly handled from conception to abortion. The loss-making technology company was never the ideal candidate to reopen Germany's IPO market, dormant since December 2002, where nightmares about the Neuer Markt, Germany's failed growth market, are still fresh in the minds of investors.

Commerzbank's unusual decision to withdraw from the syndicate over valuation disagreements also sparked investor caution early on. But the move appeared justified as German shareholder and investor groups slated the expected e138 million deal in the press. The Deutsche Schutzvereinigung für Wertpapierbesitz, the largest association representing private investors, spoke out, describing the deal as overpriced and reminiscent of failed Neuer Markt issues.

Investors were also uninspired by the fact that the majority of the IPO proceeds were to go to the vendor, parent company Elex, and towards debt repayment.
The absence of documentation and prospectuses at early presentations (they were being reprinted) proved yet another turn-off for already irked investors, who ultimately left the deal to fail on March 17.

The IPO of Siltronic, which posted a e66.7 million loss last year, was expected to raise between e800 million and e1 billion but was pulled by the bookrunners on March 24, two days before the books closed. The move was highly unusual as bookrunners normally wait for all the orders to come in before deciding to pull a deal.

Deutsche Bank, joint bookrunner on the deal, says that the 20% fall in the share prices of comparable companies since the deal was announced meant they felt a better price could be achieved by postponing the deal by a few weeks. "It's a buyer's market right now," says Joe Manko, European head of syndicate at Deutsche Bank, "investors are being very selective on valuations. The market isn't as robust as it was a few weeks ago but it could turn around very quickly."
Another source close to the deal, however, said that he had been surprised by the decision. "I am frankly surprised they pulled the deal the way they did," he says. "It's just too simplistic to blame market volatility and turmoil. I think there are a few facts missing here."

The failure of the first two German IPOs after over a year of silence in the new-issue market will not help to inspire confidence in the other German companies preparing their introduction to the market.

"It certainly doesn't help," says the head of syndicate at a European investment bank. "Any German company thinking of an IPO will certainly be thinking about what has happened."

There are currently 17 German IPOs in the pipeline, including information technology company W Nixdorf, auto parts maker ATU, shipping line Hapag Lloyd, and regional utility EWE.

But Postbank, expected to raise over e2 billion, appeared undaunted. It announced that it was bringing forward its planned IPO from autumn to early summer on the same day that Siltronic's IPO was pulled.

The failure of the two German semiconductor IPOs to get off the ground is in stark contrast to the IPO of Chinese firm Semiconductor Manufacturing International Company which also came to the market for the first time in March. The $1.8 billion deal, managed by Credit Suisse First Boston and Deutsche Bank, is the third-largest IPO in the world so far this year. The institutional order book closed 20 times oversubscribed and the retail tranche was oversubscribed an incredible 277 times.

Although it attracted very strong demand, a statement from the CFO that the proceeds would be sufficient to fund the company's capital needs until 2005, which contradicted the company's SEC filing, caused controversy. The deal closed down 11% in New York and 9% in Hong Kong on the first day of trading. As a result the deal did little to help market sentiment.

The failure of two German semiconductor IPOs this March does not mean that the market for German or semiconductor IPOs is closed. Investor demand is strong, as the success of other deals clearly shows. What is does say is that it is a buyer's market. Poorly timed, expensive, loss-making technology companies do not appear to be on the shopping list. After painful experience investors have learnt what they like.