The IPO Buzz: Behind the SCOOP Ratings

VeraSun Energy (NYSE: VSE proposed) is a South Dakota-based ethanol producer. It is among six companies that bankers plan to take public in the week ahead. And guess what? VeraSun has already increased its proposed offering terms.
On March 30, 2006, VeraSun initially set proposed offering terms to price 17.25 million shares at $18 to $20 each. In that filing, the company said it would sell 11 million shares and insiders would sell 6.25 million shares.
At the time, the IPO professionals gave it a 3-Star SCOOP rating. (SCOOP, of course, stands for Street Consensus of Opening Premiums. It gives an indication of Wall Street professionals’ consensus opinion of the demand for an IPO.)
On June 9, VeraSun increased the proposed offering terms to price 18.25 million shares at $21 to $22 each. The company is selling 11 million shares and insiders are selling 7.25 million shares.
The call from IPO professionals was increased to a 4-Star SCOOP rating.
What prompts a change in an IPO’s SCOOP rating?
The LoopNet IPO sheds some light on the subject.
A Lesson from LoopNet
Last week’s opening-day shot from LoopNet (Nasdaq: LOOP) gave no clue as to the underlying demand for its IPO. It scored an opening-day pop of 25 percent.
Bankers priced 12 million shares of LoopNet, a San Francisco-based provider of online commercial real estate services, at $12 per share on Tuesday evening. That was at the mid-point of its $11- to $13-per-share filing range. On Wednesday, the IPO closed its opening day at $15 per share, up $3 from its initial offering price. That’s an opening-day gain of 25 percent.
When the deal was originally filed on March 1, 2006, the consensus from IPO professionals gave the deal a 3-Star SCOOP rating.
Then the stock market melted down as fears of higher interest rates became more grounded in reality, with more U.S. central bankers talking about inflation and central banks in other countries raising rates. Wall Street expects the Fed to raise short-term U.S. interest rates for a 17th consecutive time when it meets on June 28-29.
Higher interest rates tend to have a negative effect on real estate, which is LoopNet’s business.
As a result, the IPO professionals’ interest waned and the SCOOP rating of LoopNet was lowered to 2 Stars.
But the experts were fooled.
The LoopNet IPO closed its opening day with a gain of $3 per share -– a performance that warrants a 3- to 4-Star SCOOP rating.
Things can and do happen to SCOOP ratings between the time an IPO is filed and by the time the IPO is priced. Some are unexpected. Others are predictable.
The unexpected usually happens the day of the pricing, such as a shift in the underlying market or industrial sector. Another example would be a sudden swing in demand just ahead of the IPO’s pricing, when an institution might step up and asked for more stock. That can make the deal turn hot, or even hotter. On the other hand, an institution might change its mind and back out of its commitment. That can make the deal turn cold.
The only ones who know this are the bankers and its corporate client, the company going public.
Reading the Signs
But there is a signal as to how well or how poorly an IPO will trade in the aftermarket.
A veteran hedge fund operator pointed out, “All you need to know about an IPO is what’s on the cover of its prospectus.”
If the deal is priced BELOW its original filing range (i.e. reduced number of shares and/or lower price), it’s a sign of weak demand from investors.
As the saying goes, “Cut a deal, cancel my order.”
On the flip side, if a deal is priced ABOVE its original filing range (i.e. increased number of shares and/or higher price), it’s a sign of strong investor demand.
There’s a saying for that scenario: “Increase a deal, double my order!”
Consider this. By Friday’s close on June 9, bankers had priced 75 IPOs so far this year, according to available reports. The average opening-day gain by all 75 IPOs was 11.6 percent.
Exactly a third -– or 25 of this year’s 75 IPOs so far -– have been priced below their original filing ranges. The average opening-day gain for the 25 IPOs priced BELOW range was 4.1 percent.
Twenty-four of the year’s 75 IPOs have been priced above their original filing ranges. The average opening-day gain for the 24 IPOs priced ABOVE range was 22.7 percent.
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