The IPO Buzz: When Things Go Wrong

On Wednesday evening, GT Solar International (GMS: SOLR) a Merrimack, New Hampshire-based manufacturer of renewable energy equipment for the solar industry, priced 30.3 million shares at $16.50 each, the mid-point of its $15.50 to $17.50 filing range.
That was a strange price for a deal that had been reportedly hot, hot, hot. On top of that, there were unconfirmed rumors people got larger-than-expected allocations rather than eye-dropper amounts.
On Thursday morning, the IPO opened flat, bubbled up to $17 and then tanked. GT Solar sold at an opening-day low of $14.05 -– DOWN $2.45 per share from its initial offering price — before closing at $14.59, DOWN 11.6 percent on its opening day of trading.
The smoke cleared the next day.
On Friday morning at 3:15 a.m., LDK Solar (NYSE: LDK), based in China, issued a press release announcing it had signed a contract to purchase production equipment from JYT Corporation, also based in China. LDK Solar was USA-based GT Solar’s largest customer. It accounted for 62 percent of its revenues for the fiscal year ended March 31, 2008, according to its prospectus.  
The IPO took another hit.
It opened at $11.76, sold at a low of $9.30, DOWN $7.20 from its initial offering price of $16.50, and closed at $12.59 per share.
Having worked on a few Wall Street syndicate desks from 1973 through 1992 and then reporting and editing on the IPO market since 1993, experience tells me that when something goes awry, the bankers have two options: (1) To cancel the offering or (2) To let it stand.
Press 1 for ‘Cancel’
Should the underwriters elect to cancel the deal, then all trades would be rescinded. It would include investors who purchased the stock through the offering and ALL aftermarket trades. Things like this have happened in the past.
But it has to be done before Tuesday, July 29, the delivery or settlement date. After that, there is no way to unscramble the eggs.
That’s when the lawyers move in.
Press 2 for ‘Let It Stand’
There was an old Wall Street cliché: “If one guy loses an eighth in an underwriting, you’ll get hit with a lawsuit.”
Note: A few years ago, stocks were traded in fractions and one eighth was 12.5 cents per share. From GT Solar’s offering price of $16.50 to its low of $9.30, the loss was nearly $220 million.
That’s greater than one eighth.
The Fallout
If you look closely, you can probably see the weekend lights burning in the offices of various law firms as they circle GT Solar. They are waiting for the July 29 settlement date to pass.
If the deal is not pulled, send in the clowns — in this case, the lawyers.
One immediate effect will be to freeze research coverage. If GT Solar and its underwriters are in litigation, nobody can or will comment.
And finally sometime down the road, when the suits get settled, the lawyers will get millions in fees. The investors will get pennies per share for their losses.
It’s good to be a lawyer.
That’s what happens when something goes wrong.
Shipwreck in Shanghai
Now let’s move on to this week and the IPO market.
The new-issues calendar for the week of July 28 lists two deals –- both out of China. One is from the advertising industry — China Mass Media International Advertising (NYSE: CMM proposed) — and the other is from the school industry -– China Distance Education Holdings (NYSE: DL proposed).
Neither the advertising industry nor the school sector has turned in a stellar performance of late. Even more startling, the Dow Jones Shanghai Index reflects a market in shambles. Consider the following (as of the close on Friday, July 25):
The Advertising Industry Index (see Google Industry Chart) was DOWN 35.1 percent for the year versus a 14.1 percent decline for the S&P 500.
The School Industry Index (see Google Industry Chart) was DOWN about 6.1 percent, which is better than the S&P 500, but still underwater for the year.
The Dow Jones Shanghai Index (see WSJ Chart) is in the grips of a ravenous bear market. The index closed at 316.97, DOWN 42.1 percent from 547.45, its close on Dec. 31, 2007. That’s a drop of 46 percent from 587.27, its all-time closing high set on Jan. 14, 2008.
Both China Mass Media and China Distance have noteworthy revenue growth. And both are profitable. But the deals are sailing into strong headwinds.
A weak industry sector coupled with a weaker underlying stock market (China) does not translate into soaring IPO opening-day gains.