IN THE FIRST seven months of this year, 143 initial public offerings were priced for European issuers, while 50 others, over one-third as many, were either announced and then postponed or launched and then pulled. That’s a very high failure rate by historical standards and comparable to the worst days of the financial system crisis that accompanied the collapse of Lehman Brothers in 2008. After the IPO market reopened late in 2009 it wasn’t meant to be this way.
Worryingly, it’s even worse for larger deals of more than €350 million where as many transactions were withdrawn in the first six months of 2011 as were completed. And even of those larger deals that did limp across the finish line, more are now trading below issue price than above, meaning investors have lost money even on the so-called successes.
The biggest deal of the year in Europe, the €7 billion-equivalent IPO for commodities and mining firm Glencore, was trading at 9% below its May issue price when Euromoney went to press at the end of July.
"I don’t think Glencore got enough buy-in from mainstream institutional investors," says one banker. "It was well anchored by the cornerstones but I think if they had priced it just 5% cheaper they might have started with a more committed long-term share register and had a better trading performance in the first days and weeks. I’ve spoken to some highly respected money managers who tell me that after seeing it price at 530p, they won’t touch it for 12 months. And that deal now hangs over the market."
And there have been other disappointments. Betfair, an online betting exchange, priced its debut offering at £13 last October and its share price rose to £15.50 on the first trading day. As Euromoney went to press, the stock stood at £6.40, more than 50% down since issue. "You have to ask if that company should ever even have gone public," one long-only investor tells Euromoney.
With large European IPOs suffering a 50% failure rate this year, an emotional debate has broken out over whether the fault lies with the highly uncertain macroeconomic backdrop in Europe or with a broken process for running initial equity offerings. It’s an important debate because a busted IPO market is a rotten sign of the fragile health of the European financial markets and economy.
"IPOs typically do well in up markets when investors want to take some risk and put cash into new names and the implicit bargain with underwriters is that they will bring appropriate companies, some of which will outperform even if some underperform," says John Hyman, partner at hedge fund manager Cheyne Capital and a former ECM banker at Morgan Stanley.
He is worried by the collapse of the process in Europe. "IPOs are a significant source of growth capital for vibrant economies," he says. "They always have been in the US, and the Chinese, having seen that, are now adopting that model. But in Europe, there has been a complete breakdown of trust, partly because there are too many banks all trying to push the envelope on valuation without taking accountability for the quality of deals being brought."
|
Banks struggle to set initial price ranges |
|
IPOs above/below/in range – 2011 YTD |
 |
|
Source: Dealogic |
Breakdown of trust amongst IPO vendors, issues and traditional investors
The investment banks that lead deals, issuers and their independent advisers and the institutional investors that buy them have been pointing to problems in the market and blaming each other.
In May, Luke Chappell and James Macpherson, managing directors at BlackRock, wrote a letter to the leading deal arrangers, expressing concern that issuers were appointing banks to lead deals on the basis of unrealistic valuations and using incentive fees to maximize issue price while BlackRock expects to buy stock in new companies at a discount. BlackRock, the largest institutional money manager in the world, even threatened that it would be "less constructive" on deals with large syndicates that it says do little to help the price-formation process.
|
"IPO candidates will have to start looking and behaving more like public companies before they are public companies"
Craig Coben, Bank of America Merrill Lynch |
|
|
"There has been a complete breakdown of trust between the buy side and IPO vendors," admits Craig Coben, head of European ECM at Bank of America Merrill Lynch, unconsciously echoing Hyman’s phrase. "And as a result of that, both issuers and investors are suffering as deals perform poorly and vendors look to venues outside Europe to list."
After some internal debate, BAML last month published a series of proposals – an apparent response to the BlackRock letter and agreeing with much of it – to overhaul the IPO process.
Its suggestions include arranging earlier meetings between company managements and potential investors in new stock; greater focus by companies on corporate governance structures; allowing for more independent pre-deal research including from non-syndicate banks; smaller syndicates or at least better management of larger syndicates as well as greater clarity over the role of independent advisers to issuers, particularly on their involvement in allocating stock to investors. BAML also asks for fuller disclosure and transparency on the metrics for allocating discretionary fees to banks and encourages greater integrity in more detailed feedback from investors, especially on valuation.
It all sounds a little obvious, and even slightly pious, and Coben admits that: "What we propose is not revolutionary." But, he adds, "90% of what we propose is not current market practice either. And while many of the difficulties facing IPOs recently have been down either to tough market conditions which none of us can control, or problems with particular issuers’ equity stories, there are also things we can all do to ameliorate the process. We can’t just carry on with business as usual."
