In the past I’ve written on this blog that IPOs that open with a pop are actually unfair to the existing shareholders of the company, and are not as “successful” as reported by the media. To this, people from the industry have pointed out that the “pop” (increase in share price on the day of listing) actually increases the value of the shares held by the existing shareholders and hence this is a good deal.
I’ve always been unsure about this kind of analysis, and have held it suspiciously as one of those views held by people who accept “received wisdom” without much questioning and so much of such wisdom gets received that it becomes a thing. While investment bankers are usually incentivised on a percentage of the money raised by the IPO, considering that they are a platform for trading, they choose to forego some of that income by transferring money to the other side of the market – the “buy side” who are their more consistent customers.
In the aftermath of the LinkedIn IPO which I had written about in a similar context a few years back, Facebook went public and it seems like they had put immense pressure on their bankers (Morgan Stanley if I’m not wrong) to “not leave money on the table”. And the IPO had opened rather flat. Not great for investors but excellent for Mark Zuckerberg and other old shareholders in Facebook.
Anyway, the reason I revisit this topic is this IPO by this Chinese company called Beijing Baofeng. Check out its share price movement:
Another view pic.twitter.com/aCl0ISnC1N
— Matt Levine (@matt_levine) April 30, 2015
The reason you see the neat step graph is that on each trading day following its IPO the share has hit the upper circuit breaker (at which point trading in the security is closed for the day). The inimitable Matt Levine has mentioned in his daily newsletter (which I subscribe to, and you should, too) that the stock has gained 1600% after the IPO, which makes LinkedIn’s doubling of share price on IPO day look like child’s play!
A takeaway from this is that investment banking remains strong as an industry, and bankers continue to shaft their hapless clients (or, if we should give them more credit, are so inept that they consistently underprice IPOs). It would be a great industry to get into except that they’re not hiring (a straw poll I conducted in the IIMB class I taught showed that hardly anyone had got a banking job)!
I continue to wonder how the IPO industry can be disrupted!