Monday 16 February 2009

IPO candidates challenged by volatile market

Firms in the West consider using Dutch auction system to conduct offerings
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IPO candidates challenged by volatile market

Firms in the West consider using Dutch auction system to conduct offerings

By OH BOON PING
16 February 2009

Westminster Travel, the first company to list here this year, closed at 12.5 cents on Friday - down 47 per cent from its issue price of 23.5 cents per share.

And while Japan Foods has not listed its shares on Catalist yet, the company acknowledged that valuations in capital markets are now very low.

And this precisely highlights the types of challenges that await those hoping to list their shares this year.

Global listing activity has also seen a sharp slowdown as capital raising slumped 78 per cent in Q3 last year. In the US, just 31 deals are now looking to raise US$7.5 billion in the current 180-day Securities & Exchange Commission (SEC) registered backlog - compared with 146 IPOs expected to raise US$43.7 billion a year earlier.

JP Morgan’s Arjun Khullar, managing director of equity capital markets, told BT that in this environment, investors prefer to buy listed peers which are already priced attractively and have less risk and uncertainty compared to IPO candidates.

Indeed, Ang Suat Ching, head of corporate finance at OCBC said: ‘Against the backdrop of the global economic slowdown and poor stock market conditions, the IPO market has seen a sharp decline in both the number of IPOs as well as the subscription rates since the last quarter of 2008.’

When asked about the challenges this year, market watchers generally cited the plunge in risk appetites as their top concern, as the VIX index closed at 42.93 on Friday - up from 24.88 a year earlier.

‘In this volatile market, investors have very low tolerance for risk periods of two or three weeks like those commonly seen in IPO exercises here,’ said Mr. Khullar.

Ernest Kan, vice-president of the Institute of Certified Public Accountants of Singapore (ICPAS), said that he sees delays in listing plans which started last year continuing in the new year, adding that ‘sponsors may also stay on the sidelines as there is a risk that the underwriter may end up with unwanted or poorly received issues’.

‘Regulators will also be more cautious due to the market risks and therefore, the good IPO candidates will have to demonstrate strong cash flow, business model, and relatively small offering compared with their total market capitalisation, i.e. the required financing is small and may be due to the fact that the company had been groomed and funded by private equity.’

Others, such as Ms. Ang, pointed to the IPO offerings that sank under water, adding that issuers should moderate their price expectations given the low prices of comparable listed companies which they will be benchmarked against.

Some said that companies can help to make their share offer more attractive by applying greater discounts to the price-earnings (PE) ratio of existing blue-chips/Catalist company in a similar industry, even though the effect may be rather minimal as prices of listed peers are now heavily depressed.

Others pointed out that if discounts are applied to already depressed benchmarks, the companies may not find it worthwhile to list their shares at all.

In the West, some companies are now considering conducting initial public offerings using an auction system rarely used for IPOs.

A so-called Dutch auction, named after famous Dutch tulip bulbs that were sold at auction during the 17th century, allows a company to monitor demand for its stock before the offering.

Companies that raised capital through Dutch auctions include Google, software maker NetSuite Inc, research firm Morningstar Inc and online retailer Overstock.com Inc.

In a Dutch auction, interested investors submit offers for how much they are willing to pay for a block of shares. The final price is set at the highest level at which all the offered shares could be sold.

This differs from the usual practice of pricing and allocation which balance the competing interests of trading clients, issuers and big investors.

Some proponents of the Dutch auction system said that it allows an issuing company to bypass the investment banks that charge underwriting fees, and avoid competing pressure from traders that get newly issued shares at a discount which can be cashed in on the first day.

Ms. Ang pointed out that the Dutch auction system is similar to the COE bidding system in Singapore, but ‘is rarely used, even in more developed securities markets such as the US’, adding: ‘Most issuers will find it hard to pull off an auction IPO unless it is a household brand name or it has an extensive customer base to support its IPO.’

Others felt that a Dutch system will yield sufficient capital only in a hot market, and not when there is very little demand for new equity investments.