As we just saw with Jollibee’s [JFC 229.80 6.39%] IPO of its Series B [JFCPB 1033.00 3.30%] preferred shares, an offering may sometimes be referred to as “oversubscribed”. In this case, JFC said that its JFCPB shares were 3.11 times oversubscribed.
For JFCPB, which had 6 million shares on offer, this means that the total pledged interest in its IPO offer was 3.11 times the 6 million shares that were available (18.66 million shares). Obviously, JFC couldn’t satisfy each investor’s request because it only had 6 million shares in the firm offer. In these situations, brokers warn that they reserve the right to scale down requests or outright reject requests altogether.
I have to admit that I don’t know how brokers solve this problem, nor do I know if the process is the same between brokers. I suspect that it’s not. The key here, though, is that if you subscribe to an offer that is oversubscribed, there’s a pretty good chance that you’re not going to get all of what you’ve asked for, and also a chance that you might not get anything.
Companies, underwriters, and brokers like to talk about oversubscription because it generates hype for the IPO; it demonstrates that, at least during the offer, the demand for the stock was more (or much more) than the supply available.
They like to heavily imply that all that demand will lead the stock to pop on IPO day, which makes sense: the company wants the IPO to generate positive press, and nothing generates positive press like investors making money; the underwriters want to have a “good feels” IPO because they love IPO fees and want to use a successful IPO as a resume to snag future IPOs; and brokers want people interested to buy because they earn money off our deposits and our trades.
MB BOTTOM-LINE
There’s not a clear line between over-subscription and post-IPO performance. Take Fruitas [FRUIT 1.35] for example. Its IPO at P1.68/share was said to have been 3x oversubscribed, but when the big day came, the stock closed at P1.71/share, up just 1.7%. FRUIT IPO investors know what happens next. Day 2 closes around P1.42 (down 15.4% from the IPO).
Day 3 and 4 are soft rebounds, but by Day 10 the stock closes at P1.08/share, down 35.7%. What happened to all of that excess demand? If you saw the underwriter’s media hit about the 3x over-subscription, you might expect the market on IPO day to be filled with thousands of frustrated, wannabe FRUIT buyers just foaming at the mouth for the opportunity to buy. That really wasn’t the case.
The buyers went elsewhere.
Take Kepwealth [KPPI 4.03 0.25%] as a counter-example. The underwriter said that KPPI was “almost” 2x oversubscribed at its offer price of ?5.74/share, but despite being more modestly oversubscribed than FRUIT, it went up 50% on its first day of trading. And another 50% on its second day of trading. And another 50% on its third day. (We won't talk about Days 4 through 787, though.)
The moral of the story (to me, at least) is that what happens when an IPO hits the market seems to have a lot more to do with the emotions and expectations of the traders than how many times an offer was oversubscribed. You can’t rely on over-subscription hype to turn your IPO Vios into an IPO Fortuner.
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