Monday, 30 July 2007

Sentiments & IPO

Sentiments in the market place plays a very important role in deciding the number of IPOs being launched. You always see a lot of IPOs when the sentiments is bullish and relatively fewer IPOs being launched when sentiments is weak or bearish.

July 2007 must be one of the 'busiest' month this year for IPO managers and underwriters. It seemed to me that all the companies are rushing to launch its IPO this month as the market was relatively hot (if we exclude the bloodshed last week on 26 and 27 July). At last count, there are 14 IPOs that are launched in this month of July alone verus only 3 IPOs in March 2007 when sentiments was very weak.

Why do sentiments play such an important role in the IPO market? Some of the reasons are as follows:

(1) It is easier for the Company to sell shares in bullish sentiments.

During bullish sentiments, it is much easier for the Company to attract investors. Some less discerning' and short term 'investors' will not care whether the fundamentals of the Company is good or not as long as they know that they can make a quick buck by fliping the shares. These 'investors' will buy the shares purely based on sentiments and many "not-so-sound" companies with no real substance will want to launch their IPO during this period

(2) Company can sell its shares at a higher valuation.

When sentiments are bullish, Companies going for listing will usually be able to list 'at the higher end' of the valuation range (thus receiving more money from selling their shares). Remember how Chemoil 'delayed' its IPO because the owner wasn't happy with the IPO valuation it received?

(3) Company can command a higher market cap post IPO

During bullish sentiments, the share price after listing will usually be much higher than its IPO price, thus creating good sentiment and goodwill among the investors. This willl in return, help to boost the market cap of the company as its share price goes up post IPO. Company with a bigger market cap finds it easier to attract talents as well as fund managers to invest in it. In addition, it is much easier for the Company to do mergers and acquisitions if it has a high market cap.

(4) Managers and Underwriter take less risk.

Manager and underwriters take less risk when sentiments are bullish as all the shares will usually be subscribed and they can earn their fees with little risk of the shares being under subscribed by the market. Thus you can see Managers rushing to launch the IPOs during good times. The Managers and Underwriters want to have the cake and eat it.

Since market sentiments has turned quite 'bearish' over the last 2 trading days, i wonder if there are any chance for the remaining IPOs in July- Yongxin, Dutech and Fujian Zhenyun to go 'underwater' i.e. below its IPO price. What do you think?

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