IPO Watch: Google's big deal
Fecha Martes, julio 27 @ 04:03:37
Tema Inversores :: Investors & VCs
| While bankers pop their champagne corks, we review the lessons learned – and the winner and loser – from last week. Plus: GOOG terms announced.
July 26, 2004
At Friday’s close, the Nasdaq Composite Index hit a new low for the year. But that didn’t stop investment bankers, who wrapped up a great week. They picked up about $118 million in IPO underwriting fees, after getting 11 deals priced and traded.
Yes, it was time for the bankers to board their yachts and pop a few champagne corks.
Their corporate clients had a good week, too. But it wasn’t quite as festive as some had hoped.
When the week of July 19 began, a total of 15 companies had hoped to go public and raise $3.1 billion. Four companies didn’t make it to market. And another seven were forced to settle for less. The offering terms of their IPOs had to be cut to entice investors to buy the stock.
By the close of Friday, July 23, a total of 11 IPOs had lifted off the new-issues launching pad and raised $2.5 billion. (OK, that’s less than the hoped-for $3.1 billion. But still, $2.5 billion is a good amount – by anybody’s standards.)
Google sets proposed IPO terms
And what does the future look like for the IPO market?
Well, at press time, Google’s proposed offering terms were announced. A total of 24,636,659 shares of Class A common stock will be offered at $108 to $135 each to raise about $3 billion. The company will offer 14,142,135 shares of Class A common stock, and selling shareholders will offer 10,494,524 shares of Class A common stock.
After the Google offering is completed, there will be 36,995,803 shares of Class A common stock outstanding and 231,523,780 shares of Class B common stock outstanding. Each share of Class B common stock will have 10 votes per share and is convertible into Class A common stock at anytime. The stock is to be traded on Nasdaq under the proposed symbol “GOOG.” The “red herring” (preliminary prospectus) stated that August share delivery is expected.
Note: The Morgan Stanley spokesperson said the timing of the Google IPO is “to be announced.”
So, a little thing like the Nasdaq closing at its lowest point for 2004 on Friday didn’t slow down those bright boys and girls at Google – nor did it give cold feet to their investment bankers.
“Where are the customers’ yachts?”
The title of a classic book about Wall Street is Where Are the Customers’ Yachts? That question rings just as true today as it did when the book was first published in 1940.
Fast forward to the summer of 2004.
The average offering price of last week’s 11 IPOs was $12.04 per share. By the time the stock market closed on Friday, the average price for those 11 IPOs was $12.35 per share. That works out to a profit of $0.31 per share. The price of a New York City subway transit card is now $2 a ride. A first-class stamp costs $0.37. You get the drift.
Against the backdrop of a falling stock market, last week’s IPO market has to go into the history books as a good one. To recap: Eleven deals got priced and raised $2.5 billion, and the average gain was 2.57 percent by week’s end.
The Nasdaq Composite Index closed on Friday, July 23, at 1,849.09, down 1.81 percent for the week. That was a new closing low for 2004. The Nasdaq was down 14.2 percent from its 2004 closing high of 2,183.83 set on January 26.
But it is an ill wind that doesn’t blow some good. There were a few lessons to be learned from last week.
Lesson No. 1
In falling markets, many IPOs cut their proposed offering terms to get the deal out the door and into the market.
The reason for a price cut is the time lag (several weeks) between the time bankers set proposed offering terms and when the deal gets priced.
Seven of last week’s deals were cut before they were priced. Their initial proposed offering terms had been set when the stock market was selling at much higher levels than last week.
The average opening-day performance of the seven IPOs priced below their initial filing ranges was down 0.26 percent.
The average opening-day performance of the four IPOs priced at or above their initial filing ranges was up 10 percent.
Conclusion: To get a deal done in today’s declining stock market, it may be necessary to cut the proposed offering terms. When that happens, don’t look for fireworks in the aftermarket.
Lesson No. 2
The big-name investment bankers with established companies have a better chance of bringing their clients public in a down market. It is more difficult for smaller bankers with less established companies to buck the trend of a falling stock market.
Consider what happened in last week’s IPO market.
Goldman Sachs, one of the big boys on Wall Street, underwrote Bucyrus International. Formed in 1880, Bucyrus reported 2003 sales of $338 million.
Based in South Milwaukee, Wisconsin, Bucyrus is a maker of draglines, electric mining shovels, and rotary drills used for surface mining. Its IPO of 7.94 million shares was priced at $18 each. The stock started trading on Friday, July 23, and closed at $22.50 per share – up 25 percent from its initial offering price.
The Bucyrus IPO was the week’s biggest winner.
Next case in point
Paulson Investment, a Portland, Oregon-based banker with a sterling reputation, underwrote Lumera. Formed in 2000, Lumera reported 2003 total revenues of $1.7 million.
Based in Bothell, Washington, Lumera is a developer of polymer materials at the molecular level (commonly referred to as nanotechnology) to improve the function of devices used in wireless and optical communications networks and for use in biochemical analysis. Its IPO of 6.5 million shares was priced at $6.95 each. The stock started trading on Friday and closed at $6.01 per share – down 13.5 percent from its initial offering price.
The Lumera IPO was the week’s biggest loser.
Conclusion
To get a deal done in today’s market, the required ingredients may be a big company with a name-brand underwriter.
Lesson No. 3
Beware of the time-delayed IPOs coming out of Asia. The last three Asian-based companies to see their American Depositary Shares (ADS) priced one week and start trading the next week hit the “wish I hadn’t bought” list.
Let’s take a look at what happened last week.
LG Philips priced 49.92 million ADS at $15 each on Friday, July 16. The stock started trading at $14.40 per share on Thursday, July 22, and closed its opening day at $14.04 per share – down 6.3 percent from its initial offering price.
LG Philips LCD, based in Seoul, Korea, is a supplier to third parties of large-size thin film transistor liquid crystal display panels.
American Depositary Shares represent ownership in the shares of a foreign company whose stock is traded in its home country.
LG Philips has a dual listing on the Korean Stock Exchange and the New York Stock Exchange.
The last two Asian-based companies that went public (with dual listings) saw their IPOs flounder in the aftermarket. In each case, the offering price was set on a Thursday or a Friday, and the stock started trading the following week.
Those deals were Semiconductor Manufacturing International and TOM Online.
Semiconductor Manufacturing, a China-based semiconductor company, priced 97.8 million ADS at $17.50 each on Thursday, March 11. On Tuesday, March 17, the IPO started trading on the Hong Kong Stock Exchange and the New York Stock Exchange. The IPO closed its opening day on the NYSE at $15.52 – down 11.3 percent from its initial offering price.
TOM Online, a China-based company providing value-added multimedia products and services from its Internet portal to users through their mobile phones, priced 11.25 million ADS at $15.552 each on Friday, March 5. On Wednesday, March 10, the IPO started trading on the Hong Kong Stock Exchange and the Nasdaq. The IPO closed its opening day on the Nasdaq at $15.58 – up just 0.19 percent from its initial offering price.
The IPO handicappers who project opening results for IPOs had been giving the TOM Online deal an opening premium of as much as $5 per share above its offering price. A week later, the projections melted down.
What’s the message?
For Asian companies wishing to raise capital in the U.S. markets, the best way to go may be to list their stock only in the USA.
Time for a pop quiz
If there’s one thing that most students dread, it’s a pop quiz. But IPO investors weather that kind of test every time they decide to buy or sell.
Last week’s IPO market reinforced some classic lessons:
To go public in a falling stock market, it pays to be a big company with a brand-name investment banker.
To get an IPO priced in a declining stock market, it may be necessary to cut the terms.
To raise money in the U.S. stock markets when your company is based in Asia, you probably will be better off to list the shares only in the United States.
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