Monday, February 13, 2006

IPO Pricing - Somebody's Taken The Easy Way Out

Merchant Bankers, Stop Stealing

Its been a long known fact that IPOs in Malaysia is an excellent way to make money, provided you can get your hands on them. Even in the bleakest of days, most IPOs will still give you 5%-10% gain on opening day. Except for that short period of time early last year where a few new Mesdaq listings even went underwater after being listed. However, that was a very small blot in the years of great gains of IPOs.

A decent listing in Malaysia would probably yield 20%-30%, anything more than that would be classified as successful. The strange thing is that, the percentage of IPOs registering more than 30% gains after a week or two is significantly higher than most other markets. You go to HK, and they would be laughing gleefully if their IPO shares got 15% gains on opening day trading. Malaysians would be quietly cursing the same thing.

What prompted me to write about this was an article in Financial Times today with the headline "String of Successful IPOs cheers Wall Street". Then a glance at the gains, I was almost choking at what they considered as "successful". Below are the biggest IPOs by value in the US in 2006 and their performance vis-a-vis their IPO price after 1 week:

8 Feb US$650m EXCO Resources (+1.5%)
9 Feb US$539m Magellan Midstream (-2%)
2 Feb US$507m Energy Transfer (+4.5%)
31 Jan US$496m Ternium (+13.7%)
18 Jan US$439m Western Refining (+3.8%)
2 Feb US$421m Healthspring (6.2%)
30 Jan US$275m Regency Energy (-0.4%)
12 Jan US$246m Linn Energy (+6%)
7 Feb US$207m Crocs (+26.4%)

I mean, the listings were decent, but certainly not outstanding when compared to Malaysia. Some may say that the issues in US were much larger, hello,... so too are their financial markets! The thing is, Malaysian merchant bankers have been getting away with murder. Competition is not hard enough, the companies do not press hard enough for a better pricing structure. Most merchant bankers in Malaysia would use previous deals as examples for sticking to the cheap IPO pricing. The local merchant bankers by sticking to this type of pricing almost completely eliminates the risk involved in underwriting an IPO - when was the last time an IPO was under subscribed (yes, there might have been cases but they are so rare). The fees generated to the merchant bankers has to be for something of value - most are just "cut and paste" type of work in terms of documentation - it is the risk involved that companies are paying the listing fees for. so merchant bankers, where and what are the risks shouldered... pray tell??

This sort of comfortable situation is accepted and "wink-wink" among all merchant bankers. Under pricing the IPO is not immaterial - it robs the owners of better prices when selling their shares, it gives successful IPOs subscribers an excessive rate of return for the risk undertaken, it allows merchant bankers to assume a lot less risk than merchant bankers in most other countries when it comes to underwriting an IPO, it causes the merchant bankers to do less homework and crunch less numbers but rely more on relationships to seal the deal - overall not a good thing for the development of a strong, maturing financial marketplace. The main reason why stocks go so wild on listing day is that the pricing was done badly in the first place by the merchant bankers.

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