The epidemic of failed IPOs may have nothing to do with valuation mismatches, the poor underlying economy, fund outflows, or market volatility per se. In Europe, at least, it may have everything to do with the fact that issuers have lost faith in the IPO process itself.
More than 150 IPOs, totalling US$70bn, were cancelled globally in the first nine months of this year. Only a fifth of those were in Europe, but those cancellations dragged the tally of European deals down to 101 for proceeds of US$27bn. And that includes IPOs that printed below the range or that traded down. All told, it’s not pretty. In 2007, before the crisis shut the market, Europe hosted almost 500 IPOs worth more than US$124bn.
The idea that it’s the process rather than the market has slightly depressing undertones, because it suggests the graveyard of cancelled deals is going to become ever-more crowded; entrenched process doesn’t change overnight.
And let’s be honest, the same people who support the broken-process theory have no incentive to do anything about it. In the ultra-competitive world of deal-making, the first guy to break ranks is as likely to have his head blown off as to be applauded, especially if unilateral moves to change the status quo run the risk of adversely impacting revenue, performance or competitive position.
So what’s wrong with the process?
Time
The length of time it takes to get deals from launch to pricing is unreasonable. Two weeks of pre-deal research followed by a further two weeks of bookbuilding leave underwriters at the mercy of the market. Deals that are launched in perfectly normal market conditions can easily fall prey to bouts of volatility that conspire to undermine the best efforts of bookrunners.
Issuers think pre-deal research is helpful; investors like it, too. But in the US, pre-deal research is banned and that hasn’t affected the US IPO market. And in deals with crowded syndicates where multiple research notes are published, all it takes is one negative or not-so-positive note to upset sentiment. The strung-out timetable is not determined by law; it’s determined by practice.
Tactics
Whether investors will warm or not to a stock is an imponderable. It’s still a buyer’s market out there and institutions can – and do – behave haughtily around the stock story and valuations. From a tactical and practical deal-management perspective, pilot fishing, wall-crossing and decoupled bookbuilding can all be helpful in gauging investor attitudes.
Positive early-intelligence signals can certainly accelerate deal momentum and might even obviate the need for pre-deal research, especially in an environment where underwriters should be looking to keep distribution tight and get stock into safe hands.
In Asia, underwriters invariably look to cornerstone investors to anchor big deals. That kind of support upfront can all but assure success. The practice of securing cornerstones certainly happens in Europe, but it’s not as widespread.
(Dis)information
Investors have got used to daily updates on the progress of deals in the market. Clearly, it’s incumbent on underwriters to keep investors updated, but this can be a tricky dynamic to manage. Many investors tend to hold back submitting orders until they’re relatively sure that a) the deal’s going to work and b) they’re going to get allocated.
But in demanding daily size-of-book and other updates from underwriters, they will invariably ignore their own laggardly behaviour and form a jaundiced view of how a deal is going based on the latest daily update. There is such a thing as too much information and, taken out of context, it can quickly become disinformation.
Syndicates
There’s also such a thing as too many banks in a deal. There’s been a marked increase in the size of underwriting syndicates over the years. Deutsche Bank’s €10bn-plus rights issue had a staggering 35 banks in the syndicate, while the €2.3bn IPO of Enel Green Power had an equally ludicrous 10 bookrunners.
Big groups make tight deal management almost impossible. It can be hard to keep everyone disciplined, focused and on-message. It can also lead to frenzied and unseemly behaviour as banks chasing the same buyside accounts scramble for order allocation.
Bookrunners – and more specifically independent IPO advisers – need to manage issuers’ expectations around syndicate formation and lead them away from the notion that more is more. Quite often, it’s the opposite.
And finally (in an act of corporate nossa culpa), league tables can have a distortive impact on underwriter behaviour as it forces them to try and get into every deal to claim credit. Maybe it’s time to introduce rules where only active bookrunners get credit and/or that allocate league-table credit based on actual underwriting.