Published September 8, 2008
If IPO conditions are so bearish, who is subscribing?
By R SIVANITHY

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THERE'S no denying that the initial public offer (IPO) market is in pretty bad shape - about 90 per cent of IPOs this year are below their offer prices and anyone brave enough to list now is almost guaranteed to see their shares trade at a first-day discount.
Companies should be aware that they risk sending a negative signal about their prospects if they choose to list under such conditions.

This is clearly in stark contrast to a year ago when IPOs tended to be oversubscribed and the industry was booming because of a 'sure-win' mentality. These days, mention IPOs and in the same breath you'll hear 'sure-lose' instead. Which raises two very interesting questions.
First: should companies list in the first place if large first-day and possibly first-month losses are almost 100 per cent assured?
Or should underwriters be more circumspect and advise their clients to wait until conditions improve because a bit of patience would save shareholders a lot of grief?
Second (and much more intriguing): if it's very obvious that IPO shares can be obtained cheaper in the days after listing, who is buying at the IPO stage?
To answer the first question is not easy. Companies and their underwriters (or sponsors, in the case of Catalist) might argue that there is no ideal time to list and that if a company has reached a stage in its life or business cycle where it is essential to go public in order to grow, then that's what they should do and never mind the timing.
The rejoinder to this, however, is that companies which choose to list when sentiment is as bearish as it is now may be doing a disservice to shareholders. This is because the market may choose to interpret a listing under these conditions as indicating sub-par fundamentals - you know the market is bad and yet you choose to list; ergo, you must be in dire need of cash, in which case your prospects must be questionable.
This could be what we're witnessing now - massive scepticism leading to large first-day discounts which are today the norm, when they were the exception last year.
Some observers might argue that it's all a matter of price; pitch the offer low enough and you might avoid poor first-day performance.
Studies, however, have shown that underwriters are always more likely to underprice IPOs than overprice them since this reduces the risk that they will be stuck with unwanted shares. In other words, making an IPO as cheap as possible makes the underwriter's job easier.
So, despite the fact that underpricing is very probable in the first place, today's IPOs are still failing badly - not at all a good signal to be sending the market.
On balance, it's difficult to arrive at any firm conclusion about whether IPOs should be postponed in an extreme bear market - the best that can be said is that companies should be aware that they risk sending a negative signal about their prospects if they choose to list under such conditions.
Now, given that a first-day collapse in an IPO is a virtual certainty and no one wants to buy, where are the necessary 1,000 shareholders to satisfy the listing rules coming from?
This is a very thought-provoking question, for which answers are difficult.
It could be that the companies going public, their placement agents, sponsors and underwriters have such well-established marketing and sales networks that they are able to find the necessary number of people to take IPO shares at the offer stage.
And it could be that the minimum 1,000 shareholders who subscribe are doing so because they have faith in the companies they are buying into and are confident of future prospects.
Yet what price faith, when a first-day loss is almost certain? Who in their right mind would subscribe to IPOs, knowing that there is a very high chance they could buy on the first day at a lower price?