The proposed initial public offering (IPO) by social networking firm Facebook Inc has created an unusual cheer for the market. Touted as the largest public offer by an internet company, it has created interest among investors across the globe. San Francisco realty is said to be booming. Even the local markets seem to be excited, gaining for the fifth week in row. But some analysts are wary of the curse of some large IPOs, which came with similar hype, but were followed by a crash in the secondary market.
Valuations are clearly stretched, some feel. While the company’s profits are less than half that of Coal India, its price is twice. Economist Ajit Ranade tweeted, “Coal India: Revenue $13bn, Profit $2.2bn, Value $50bn. Facebook: Rev $3.7 bn,Profit: $1bn, Value $100? 1/3rd revenue, 1/2 profit yet.”
Facebook filed papers for an estimated $5-billion float after a world-beating performance by the US markets in 2011. US stocks gained from money fleeing for safety from around the globe while most emerging markets lost due to risk aversion caused by European sovereign crisis. sovereign issues.
Though most of Europe’s problems are yet to be sorted out, there is a rally in stocks, globally making sceptics question the fundamentals of this rally. Indian benchmarks ended with gains for a straight fifth week. Bears have turned bulls overnight, adding to the disbelief.
Rajeev Thakkar, CEO & director, Parag Parikh Financial Advisory Services, said, “Usually, large IPOs come into the market at a time when there is euphoria. People want to cash in, when the equity market valuations are high.”
| THE CURSE OF THE BIG IPOS | |||
| Country | Issuer | Issue date | Issue size ($ bn) |
| (i) USA | Visa Inc | Mar 18,2008 | 17.86 |
| (ii) Hong Kong | AIA Group | Oct 22, 2010 | 17.82 |
| (iii) China | PetroChina Co Ltd | Oct 29, 2007 | 8.94 |
| (iv) China | China Shenhua Energy Co Ltd | Sep 26, 2007 | 8.85 |
| (v) India | Coal India Ltd | Oct 25, 2010 | 3.50 |
| (vi) India | Reliance Power Ltd | Jan 18, 2008 | 2.90 |
| (vii) India | Reliance Petroleum Ltd | Apr 24, 2006 | 1.80 |
| Remarks (i): The Dow Jones index was at 12,600 in March 2008. By March 2009 it had dropped 50% (ii): The Hang Seng was near 24,000 levels during October 2010. By October 2011 it had dropped 32% (iii): A clutch of big IPOs issuances took place in the Chinese equity market in the second half of 2007. Shanghai Composite touched its all-time peak of 6,092 in October 2007; came off more than 70% to 1,700 levels by October 2008 (v): Sensex touched an all-time high on a closing basis around its listing; market came off 25% after that (vi): Sensex above 20K; fell 60% subsequently (vii):Sensex near 12k; fell 30% below 9k levels in two months | |||
In 2008, Visa Inc hit the street with a $17.8-billion issue. The Dow Jones index, which was trading around 12,600-mark, lost 50 per cent of its value over the next one year. In October 2010, two large IPOs, Coal India and the AIA group, hit the street in India and Hong Kong, respectively. Both markets, trading around their all-time highs at the time of listings, lost around 30 per cent in the following year. The Sensex’s previous all-time high in early 2008, coincided with the launch of Reliance Power’s IPO followed by a painful crash. In 2006, the Reliance Petroleum IPO had a similar impact.
Another unnamed banker likens the big IPOs to the skyscraper theory. “The construction of tallest towers sucks out resources and eventually leads to collapse of the economy. Big IPOs are the market equivalent of those skyscrapers. Many times, they lead to crashes,” said a banker with a domestic investment bank.
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Thakkar of Parag Parikh hopes Facebook is different. “Valuations are not exceedingly high. Therefore, the correlation may not be true this time.”