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Stock Commentary

If an IPO only goes up a few percent, is it still a successful IPO?

Merkado Barkada
If an IPO only goes up a few percent, is it still a successful IPO?

This is a great question and one that reveals some of the competing interests at play in an IPO.

Fundamentally, an IPO is used to raise money (capital), either for the IPO company itself (primary shares) or for the parent company and/or selling shareholders (secondary shares).

Sometimes, an IPO is required as part of a concession contract, like the one that will require the water concessionaire, Maynilad (owned by Metro Pacific [MPI 3.73 1.84%] and DMCI [DMC 8.98 0.55%]), to conduct an IPO in the next few years.

In either case, a successful IPO for the company or for the selling shareholders is one that sells all of the IPO offer shares at the highest price possible, and this happens surprisingly early in the IPO process.

As retail traders, we only get a chance to buy the shares during the IPO offer period, but at that point, the shares have already been sold by the company or the selling shareholders to the IPO underwriters, and it’s the IPO underwriters who are selling shares to the brokerages to sell to us.

The company and/or the selling shareholders have already technically raised the money before even the first shares are sold during the offer period. To them, the IPO is already a success, regardless of what happens on the IPO day (within reason, of course).

The math is a little different for investors and traders. For us, a successful IPO is one where the price goes up. For traders, they’re mostly looking for those big short-term moves.

Even short-term down moves are useful to traders (just think back to when Solar Philippines NEC [SPNEC 1.85 3.14%] was down almost 25% in the first few minutes of trading on its IPO day). For investors, they’re mostly looking for the IPO price to hold, and show some strength.

So long as the current price stays above the IPO offer price, they’ll be sitting on gains and the risk of the investment will have been worth it.
 

MB BOTTOM-LINE

Companies would naturally rather raise money through an IPO that also makes IPO investors some money, too.

There’s nothing like a huge IPO to generate a huge crop of good vibes, especially when a lot of people make a lot of money.

Sometimes, companies and underwriters can try to smear some of those good vibes onto future offerings, and vibe transfer has value, but for the most part, a successful IPO for a company is one where the shares get sold and nobody gets mad.

Obviously, Medilines Distributors [MEDIC 0.88 1.15%] is a good example of one where both the selling shareholder and the underwriter probably took a reputational hit, given the terrible performance of the stock after what really looked like an over-priced, cash-out IPO.

But the truth is that companies aren’t super concerned in the short term about an IPO that drifts up and down a bit, maybe even below the offer price, because from their perspective, the IPO has already been a success: they’ve sold the shares and raised the money.

Of course, the existing shareholders are pleased to see the value of an IPO climb, because the strongest evidence of their own shares’ value is the market value of the stock, and the higher the market value, the higher their net worth.

Maybe some of this is obvious, but it can be important to remember that all of the IPO parties have different views of what a success might be, especially when it comes to evaluating your own chances of success as a potential IPO investor.

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Merkado Barkada is a free daily newsletter on the PSE, investing and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.
Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

MAYNILAD WATER SERVICES INC

MEDILINES DISTRIBUTORS INC

PHILIPPINE STOCK EXCHANGE

SOLAR PHILIPPINES

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