The IPO Buzz: Rolling the Dice

The stock market conditions were less than ideal, with the Nasdaq Composite Index hitting a low for 2006 on Tuesday, May 23rd. At that point, the Nasdaq was down 9 percent from its 2006 high set on April 19.
Wall Street’s investment bankers rolled the dice anyway, just to get the deals done. And the Nasdaq, the barometer of the IPO market, ended the week up 0.75 percent. 
Vonage Holdings (NYSE: VG), a Holmdel, New Jersey-based VoIP provider, priced 31.3 million shares at $17 each on Tuesday evening to raise $531 million. On Wednesday morning, the IPO opened at $17 per share, ticked up to $17.25 and then tanked. It closed at $14.85, DOWN 12.6 percent from its initial offering price.
Things didn’t get any better. On Thursday, Vonage sold to a low of $12.63 and closed Friday at $13.02, DOWN 23.4 percent from its offering price.
Vonage came to market with a lot of heavy baggage. It is a one-product company facing heavy competition from established competitors with deep pockets. It has yet to turn a profit. Since being formed in 2000, Vonage has racked up an accumulated deficit of $467.4 million. If all of this wasn’t bad enough, its founder, CEO and the majority stockholder, had problems with the securities regulators, as reported in the prospectus.
Following the Vonage IPO’s collapse, the questions circulated among IPO professionals were: Would the deal be cancelled? And, if not, what about lawsuits?
The underwriters have until Tuesday, May 30, the settlement date, to cancel the offering. Should it be yanked, then all the trades get whipped off the books. It would be a non-event — no money and no stock would have changed hands.
Concerning possible lawsuits, there’s an old Wall Street saying that sums it up: “Let one person lose an eighth in an underwriting and you’ll get a class-action lawsuit.” When the saying came into being, stocks were traded in eighths of a point, or eighths of $1, which works out to 12.5 cents a share.
MasterCard (NYSE: MA), a Purchase, New York-based credit-and debit-card company, priced 61.5 million shares at $39 each on Wednesday evening to raise $2.4 billion. On Thursday morning, the IPO started trading at $40.30 and closed at $46, UP 17.9 percent from its initial offering price.
The MasterCard deal’s size, over $2 billion, made its pricing sensitive. On Wednesday evening, there was a huge cloud overhanging the IPO market. The high-profile Vonage deal had just finished its first day of trading in the tank. That must have spooked people.
As a result, the MasterCard deal was priced at $39, well below its filing range of $40 to $43 per share. That’s an old trick: Under-price a deal to get it out the door and to trade at a premium. It worked. The IPO scored an opening-day gain of $7 per share.
Bank of China was a super blockbuster. On May 24, BOC priced 25.6 billion shares (that’s right “b” as in billion) at HK$2.95 each (38 cents in U.S. currency) to raise about US$9.7 billion. Now here’s where it starts to get tricky. The deal is scheduled to START trading on June 1 on the Hong Kong Stock Exchange.
Distributions of IPOs listed in China and Hong Kong fall under different rules than American IPOs. In China, there is a delay of about a week between the pricing date and the trading date. In the United States, a deal is normally priced after the close one day and trades the next morning.
BOC investors will have to sweat it out and hope that nothing negative happens during the week-long holding period.
U.S. investors won’t have this worry. The deal was not registered with the Securities and Exchange Commission and was not offered to U.S. citizens.
However, the Chinese pricing system turned out to be snake eyes when the dice were rolled in March 2004.
TOM Online (Nasdaq: TOMO), a Beijing-based provider of Internet services and products, priced 11.3 million American Depositary Shares at $15.552 each. The shares were to trade on Nasdaq and the HKSE, so the Chinese rules prevailed. The deal was PRICED on March 5 and STARTED trading on March 11.
The IPO closed its opening day at $15.58, up 2.8 cents per ADS. Before the deal was priced, the professionals whose opinions make up the Street Consensus of Opening Premiums (SCOOP) Ratings gave the deal 4-Stars, expecting it to trade $4 to $5 per share above its initial offering price.
Between the time that TOM Online was priced on March 5 and started trading on March 11, 2004, the Hong Kong stock market fell apart. On March 1, the benchmark Hang Seng Composite Index sold at a high of 14,058. On March 11, it sold at a low of 12,979.
The week of May 29, 2006:
The week following the Memorial Day holiday generally is slow for IPOs. In 2005, just two IPOs were priced that week. For the year, bankers priced 236 IPOs.
In 2004, two IPOs were priced in the holiday-shortened week. For the year, bankers priced 248 IPOs.
In 2006, bankers expect to price five IPOs, but three have been on the new-issues calendar before.
Stay in the loop with the
To learn what’s “hot” and what’s “cold” on the calendar, subscribers, please use your passwords for the SCOOP ratings. For others, we invite you to sign up for a 30-day free trial subscription. There is no obligation.