EXPERTS have cited many reasons for the near collapse in London’s market for new issues and its only partial recovery this year. These have ranged from a hunch that private equity sellers have tended in the past to be too greedy, that the UK institutional shareholder is too risk averse, that banking syndicates are too large and that the ecosystem for sectors such as technology just isn’t there in the way it is, say, in New York.
Last week at City A.M.’s roundtable discussion on the IPO market, another view was proffered; that London’s market for new issues suffers relatively to its rivals from the scrutiny afforded to it by an overly zealous and often negative financial media.
At the very time the discussion was going on, the Canadian bank RBC and Barclays were pulling the flotation in London of Caracal Energy, a company with big interests in Chad. Was the feisty UK media to blame for this? Not at all. There was barely any coverage of this smallish flotation, apart from a couple of cursory articles that did mention the vagaries of doing business in Africa and the obviously relevant fact that the group in question had tried to float in Canada some months before and had failed. But there was scarcely anything sensational about the media coverage and advisers have attributed the failure to raise money to the fact that investors were unhappy with the valuation in the wake of a falling market for exploration stocks.
Those who blame the UK financial media for some of the market’s current travails point to the way in which the flotation of the internet grocer Ocado was covered in July 2010.
Widespread criticism of Ocado’s business model, especially the company’s reliance on one customer, Waitrose, led to much negative media coverage.
Its shares were then priced at 180p, the bottom of the price range. Even then, the shares traded disastrously after the flotation for several months, and Ocado became the example par excellence for those who wished to vent their anger and cynicism on the IPO market as a whole.
Now Ocado’s shares are riding high at 275p following its deal to advise Morrisons on its on-line retailing. But the sour taste of its ill-starred entrance onto the market is not easily forgotten.
But it is too easy to blame the press for Ocado’s flotation woes. The press reflected some of the bearish views out there but also reflected a plausibly accurate view that the new shares might have been overpriced, given the group’s revenues at the time. New issue investors traditionally need to be chivvied along to back newish companies with a discounted share price.
In recent flotations there has been a paucity of independent research on IPOs, even ones as large as Partnership, which recently joined the market with a valuation of £1.5bn. In such situations it is surely a good thing for the sake of creating an informed market-place that an enquiring media asks questions about business models, who is selling shares on flotation and who is being locked in and whether those lock-up periods really mean what they say they are.
It is not surprising that investment banks would rather only let the press report on an IPO process once shares have been priced and effectively placed with institutions, but that would be a shame. The more openness, the better, especially in order to try to root out at an earlier stage some of the problems that have occurred with the listing of companies like ENRC and Bumi Resources.
Bankers should concentrate on winning over the press, alongside the analysts and investors – not seek to shut them out.