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| IPOs: ipso facto good news |
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| Tuesday, 27 July 2004 | |
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27
July, 2004: Glass half full or glass half empty? Much of the analysis
on the recent series of ICT share floatations has stressed the negative
aspects of the IPOs in question. Scaled-back sales at knocked-down
prices do indeed look grim. In reality, however… …these IPOs are what passes for 'good news' after the industry's financial woes of the last few years. To be sure, there have been some snags in setting prices at the level required to get the sales off the ground. Inevitably, these have attracted the attention of the headline-writers. Not that many of the more spectacular headlines have been easy to resist. Off to market Yesterday saw search engine Google's announcement of plans to float around 10% of the company, valuing the company above US$36bn at the top of the indicative sale price range. Unfortunately, in what is unlikely to have been a coincidence, yesterday also saw Google under serious attack from hackers armed with a variant of the 'MyDoom' virus. No need to ask which of these two events grabbed the headlines. Last week, Motorola was forced to reduce the target floatation price for its Freescale Semiconductor chip-making arm to US$13 per share, down from US$19.50 at the top of the original price range. As a result, the IPO netted around US$1.5bn instead of an anticipated US$2bn. Earlier last week, the IPO of Virgin Mobile only got away after a similar price reduction, in this case from a top price of UK£2.85 per share to UK£2.00, bottom of a revised range. The size of the float was also scaled back from an original 40% to 25% (for more analysis, click here). The stock was yesterday trading at 5% below the initial sale price. At the beginning of this month, France Télécom sold a 40% stake in its Pages Jaunes directory subsidiary at €14.14/€14.40 per share (for retail/institutional investors) – towards the top of the price range. The sale netted around €1.7bn for FT which is earmarked for covering the cost of its buyback of minority shareholdings in Wanadoo, its Internet/ISP arm. And this all adds up to…? The combined market capitalisations of these four market debutants is around US$60bn. Even though Google will account for a high proportion of this when the tranche is sold next month, the quartet have a geographical spread – US, UK, Euroland – and a range of business activities – IC manufacturing, virtual mobile operating, business directories, Internet services – to provide a reasonable barometer of industry health across a broad range. One reason why it is possible to treat these achievements as good, indifferent or bad is an intellectual and emotional throwback to the fallout from the technology 'boom/bust' with April 2001 at its apex. This manifests itself in a form of nervous caution on the part of companies and investors alike. An inherent part of any putative IPO is to 'talk up' the prospect of the business involved. Small investors have heard this before and many have the immolated fingers to prove it; no wonder they reflexively shy away. The institutions, meanwhile, are still in payback mode when it comes to their dealings with tech companies. The latter in turn, continue to point the finger at the institutions and analysts for their roles in creating the excess of the late 1990s. Indeed, there are signs that companies are factoring this ongoing mutual recrimination into their IPO strategies. FT insisted that the lead banks on its Pages Jaunes IPO set the initial sale price with accuracy or forfeit some of their fees. This was an attempt to avoid a volatile debut for PJ's stock. During the boom, few companies worried about this, despite the fact that an underpriced IPO deprives them of receipts from the sale and an overpriced ones creates misery and distrust among investors. This new approach shows an increased level of responsibility. More radical is the approach which Google intends to take to market. It plans to cut out Wall Street as far as it can, relying instead on Internet auction of shares direct to investors. While this will be worth watching and seems like an honest attempt to achieve transparency in the IPO, Google's promotion of this 'new paradigm' in share floatation has some uncomfortable echoes of the obsession with 'new ways of doing things' that grew up in the 1990s. The jury's still out on this one. …a cautious improvement With all these different parameters to consider, it is indeed hard to say whether the ups and downs of IPOs are for better or for worse. It could be, however, that the clinching fact is that these floatations are taking place at all. After technology stocks went into reverse, the IPO market went into hibernation. OK, these recent floats may add up to little more than a few in the industry poking their snouts out of their snowholes, but if they like the way the breeze is blowing, they may venture out a wee bit further in future. Ipso facto, these IPOs are a positive development – so long as confidence, not over-confidence, remains the order of the day. Jim Chalmers |
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