• Sat
  • Aug 30, 2014
  • Updated: 4:46pm
Mr. Shangkong
PUBLISHED : Monday, 05 May, 2014, 5:38am
UPDATED : Monday, 05 May, 2014, 6:54am

Big-name banks no guarantee for IPO success

Shuanghui's US$6 billion share offering proves having many renowned global investment advisers on the job not a guarantee for success

BIO

George Chen is the financial editor and columnist at the South China Morning Post. George has covered China's financial industry and economic reforms since 2002. George is the author of Foreign Banks in China. He muses about the interplay between Shanghai and Hong Kong in Mr. Shangkong columns every Monday in print and online. Follow George on Twitter: @george_chen
 

The failure of top mainland pork producer Shuanghui's US$6 billion initial public offering - once slated to be Asia's biggest this year - offers at least two lessons - never overestimate the power of investment banks and never just go for big names.

Despite having a record 29 investment banks to help its listing in Hong Kong, including almost every big name that can be found on Wall Street, WH Group - previously known as Shuanghui - was initially forced to cut the size of its share offering before it was eventually cancelled because of cool market response.

Given Shuanghui's fame, especially after it acquired top US meat processor Smithfield Foods last year, as well as the renowned international and mainland investment banks involved in the share offering, the failure of the listing was much talked about by global investors from New York to Shanghai.

Mr. Shangkong even received an e-mail from an American professor who said that if he could have more information, he could make it a case study for his MBA course. Sounds like a good idea.

About a decade ago, there were usually only three or four investment bank logos printed on the cover of a company's prospectus, including one or two lead banks, with the others taking roles as bookrunners.

WH's offering was widely considered overpriced, so its failure was anticipated

For Shuanghui, 29 bank logos occupied almost half of the cover of its prospectus. Some readers could have been excused for thinking it was a book about investment banking, and not about a company's initial share sale.

The concept of "the more banks, the better" began to gain popularity after the 2008 financial crisis.

Given the weak market environment then, when a client wanted to go public in Hong Kong, it would ask banks to find as many so-called "cornerstone investors" as possible before it opened the books to the public. If such investors could be secured to take up about 50 per cent of the share offering, the company would have little to worry about the sale's success.

This led to banks pitching for the same client.

In some cases, it worked. In 2012, People's Insurance Co of China, one of the three biggest state-owned insurers on the mainland, hired 17 banks for its Hong Kong flotation and they got more than a dozen cornerstone investors to take up over half of the share offering.

Cornerstone investors are, of course, not stupid. In some cases, they agreed to buy shares recommended by banks for portfolio or other long-term reasons.

However, most companies newly listed in Hong Kong so far this year have seen their share prices fall far below their offer prices, making it difficult for banks to lobby institutional investors in new issues.

This was especially the case when WH's offering was widely considered overpriced, so its failure was anticipated even before it was launched.

When there are only three or four banks working on an offering, the chances are that they will be determined to make it a success to ensure a big share of the fees. But when there are 29 banks, the boat is just too crowded and may even become another Titanic.

 

George Chen is the financial editor and a columnist at the Post. Mr. Shangkong appears every Monday in print and online. Follow @george_chen on Twitter or visit facebook.com/mrshangkong

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This article is now closed to comments

boondeiyan
You can probably level some criticism at syndicate bankers for the time-honoured practice of promising the undeliverable to curry favour with the issuer. A syndicate that size is indeed a recipe for a clusterflock. But the issuer makes the final decisions and this result ultimately reflects on them. As for your professor friend he can find his case study material by perusing "King Lear" or if he needs an Asian perspective, Kurosawa's "Ran". Same patriarchal decision-making, same bloody result.
richardg23
Can't entirely blame the banks - the company chose too many banks (by about 25), over-priced it against banking advice, and the top 2 execs took US$600m bonuses out of the business - what investor would sign up to that? Hopefully some pricing and adviser-selection rationality will return to issuers...
XYZ
Twenty-nine investment banks splitting fees on a smallish IPO selling overpriced shares in a mainland Chinese company run by two executives who recently paid themselves US$600 million in bonuses.
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What could possibly go wrong?
 
 
 
 
 

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