|
When a company first
floats on the stock market, it is called an Initial Public Offering (IPO),
implying that at least some shares are offered to the public. Indeed
historically such offerings were frequently advertised in the national
press. The offering was typically made at a fixed price, with an underwriter
guaranteeing to purchase any shares not taken up by the public (the public
in this case of course were often mainly the major institutions).
Frequently the IPO price
was pitched at a conservative level to try and ensure that the shares were
"got away" (ie. all sold) and that a "healthy" (ie. rising) after market
resulted. In the rare circumstance that underwriters were left with a
substantial proportion of the shares offered, this tended to act as a drag
on the after market and a subsequent falling share price which is anathema
to the existing holders of the stock who usually promoted the IPO in the
first instance.
This simple scenario
operated for many years, and in good times it was relatively easy to make
profits by "stagging" the shares, ie. buying them at the IPO and selling
soon after. However, there were several problems that were perceived. These
included: a) a surplus of demand over supply for popular issues, leading to
ones allocation being reduced, sometimes to a small fraction of what you
applied for; b) a perception that underwriters were making a lot of money
but taking little risk; c) a feeling that the low prices at IPOs resulted in
less than optimum prices for the sellers. As a result a "tender" process is
now often used to ensure a better price and control demand - this reduces
the opportunities for stagging.
Another change has been
that there are now fewer public IPOs. Smaller issues are now often "placed"
by a private offering to a limited number of institutions, with the general
public excluded. This can have advantages for the vendor as it is cheaper,
and the resulting number of people on the share register is much less, but
share liquidity is often poor. Also it tends to result in bankers placing
the shares with a few favoured clients, much to the disadvantage of smaller
shareholders and the market as a whole. See the following article from
our Newsletter for comments on the current situation:
IPOs_2000.
A more recent article
by John Mulligan about the problems that private investors have recently
faced on getting information on new IPOs is present at:
IPO_Note.
One thing you should
bear in mind if you do buy shares at an IPO, and you don't sell soon after,
is that on average such issues show negative performance relative to the
stock market as a whole. In practice it's often better to wait a year or two
and buy the shares then. Why do such companies under perform the market?
Mainly because it's easy to get a good price for a share when it is being
actively promoted, the merits and prospects of the company are being puffed
up, and publicity generated for it. Also the insiders know best when to sell
and when to buy, and they are selling in an IPO. So take anything said in
the Prospectus with a pinch of salt, but incidentally it is good to read the
prospectus of any company that has gone public in the last couple of years
because it typically contains much more information on the business than you
can easily obtain elsewhere.
UKSA made several
submissions on the subject of IPOs in 1996 and 1995 which can be read below:
Initial_Public_Offers_Brief_Analysis_1995
Initial_Public_Offers_Full_Analysis_1995
Initial_Public_Offers_Response_1995
Initial_Public_Offers_1996
The subject of Underwriting costs are covered
in the following:
Underwriting_MMC_Response_1998
Underwriting_MMC_FollowUp_1998
|
