Goldman Sachs

Investors' interests rarely rate in IPO league tables

PUBLISHED : Saturday, 29 December, 2007, 12:00am
UPDATED : Saturday, 29 December, 2007, 12:00am

The end of the year is a time for scorecards. Investment bankers are busily comparing league tables, for pride and money. I am going to do one, too - not for the bankers but the investors.

I tried to figure out how the year's initial public offerings fared for investors, instead of comparing the money they raised.

After all, 2007 has been a bumper year for initial public offerings. The number of offerings reached records and betting on listings has probably drawn more interest than Mark Six.

Goldman Sachs should be the most loved of the banks by punters. Of the eight listings it sponsored, all bettered the offering prices on their first day of trading - most notably, which gave the first-day punter a 192.6 per cent return.

While Alibaba was by far the best performer, Gold Bond, a boutique firm run by a former Peregrine banker, also put in an impressive performance. But the offering's size was insignificant.

However, for long-term investors, it is a different story. By yesterday, only 50 per cent of Goldman's deals were still above their offering prices. Morgan Stanley and Merrill Lynch scored better under both the short-term and long-term measurements. About 66 per cent of their deals continue to give initial public offering investors a positive return.

Well, let's be fair. Goldman's long-term performance is no better or worse than the industrial average. Of the year's 83 initial public offerings, only 65 managed to trade up or at par on the first day - about 78.3 per cent. The number drops dramatically to 48.9 per cent on an up-to-date basis.

It means you are far better off dumping the stock on the first trading day. Among those who held, most would be counting their losses.

That tells a lot about the quality of the issuers, many of whom have rushed to cash out amid the fever for new listings.

I am sure some will argue that the recent market correction may have a lot to do with the poor long-term performance. Yet it is important to remember that the correction has only brought the index down to early October levels - and many of the stocks listed before that month had already dived well below their offering prices.

The most stark example is mainland steelmaker Tiangong International, which was sponsored by BNP Paribas. Its new shares shot up 81 per cent on their debut in July. Yesterday, the shares were more than 11 per cent below the offering price.

But at least it is still trading. Shares in Taiwanese coating producer Regent Manner International Holdings were suspended from trading last month - four months after the stock was listed - pending more details on the resignation of a director. Two Taiwan-based investment banks were the sponsors.

Some blame the listings fever. Managing price in the early trading days has become part of the service for many banks. There are the legal tools, which include the price stabilisation mechanism. This allows sponsors to buy shares at the offering price and apply skilful allocation to increase scarcity. Then there are the shadier methods. The banks may call on 'friends' to buy shares in the secondary market on the condition the controlling shareholders will eventually buy them back at a premium.

'Expecting more upside, people are ready to suck up every stock available on the first trading day,' said an official of a mid-sized investment bank. 'Some of these tricks are not necessary.'

It is not always so easy. When firms set a high offering price it can get tricky. 'When a manufacturer is selling his stock at a 25 times price-earnings - an incredibly high valuation - it can only go down in the long term,' said the banker.

As the tide retreats, we will soon find out who is left standing naked. I am more than happy to work out another league table by the end of 2008 - revealing the investment bank behind the biggest number of newly listed companies to go bust.