IPOs With Brand Recognition – Tyler Vernon – The Wall Street Journal
With well-known companies such as Skype SA and General Motors Co. planning to go public, investor interest in IPOs is picking up.
Brand recognition, however, isn’t making their advisers any more comfortable with the initial public offerings. Many worry that individuals will act emotionally and overpay for stock whose value hasn’t yet been determined by the markets.
“While we’re getting this buzz, we try to steer investors away from this,” said Tyler Vernon of Biltmore Capital Advisors, a family office firm in Princeton, N.J., who would rather see clients “play in Vegas than invest in IPOs.”
“I think people are looking for something new,” he said. “They’ve lost a lot of interest in the stock market, and they’re looking for other ways to build wealth.”
Traditionally, the average investor has had little access to IPOs. Institutional investors typically acquire 70% to 80% of the initial offering, and the remaining stock is distributed by the underwriters, often to their favorite big clients.
In the late 1990s, when IPOs often soared swiftly in value, investors scrambled to get shares. Many of the IPOs were technology companies, and when the bubble in that sector burst, so did investors’ appetites. The more recent financial crisis reduced both IPO activity and interest even more.
This hasn’t been a particularly good year for IPOs, said Linda R. Killian of Renaissance Capital LLC in Greenwich, Conn. “Some have done some spectacularly well, and some have done spectacularly poorly,” she said.
So far this year, 70% of 86 IPOs in the U.S. have seen their prices drop after the original offer, Ms. Killian said. In the past, individuals also made the mistake of overpaying for well-known brands, such as Polo Ralph Lauren Corp.’s offering in 1997, and then got stuck with underwater stock for quite a while.
GM last Wednesday filed plans to launch an initial public offering that Bill Buhr, IPO strategist at Morningstar, characterized as “an intriguing, high-interest deal.” The auto maker has shown signs of improvement, but a lot of questions remain, including whether the stock will be priced attractively, he said. Fees on the deal also will get extra scrutiny because of the government bailout of the auto maker.
Investors must consider in any IPO who is going to benefit most from the sale, Mr. Buhr cautioned. They should beware if much of the proceeds are going to top managers or to existing investors.
If much of the proceeds are going to top managers, it could indicate that top management is getting bought out. If too much goes to the private-equity firm that took it private, it could indicate that the money isn’t going to the company for improvements.
Lee Munson, chief investment officer of Portfolio Asset Management in Albuquerque, N.M., steers clients away from all IPOs.
“With an IPO you have no price discovery,” he said. “The capital markets need to discover what something is worth.”
Looking back, he said: “In the dot-com days, all it was was a transfer of wealth from individuals and pensions to kids in Silicon Valley.”
Another problem, said Biltmore’s Mr. Vernon, is that “people get emotionally tied to the position. Sophisticated investors sell immediately and individual investors will get stuck holding the bag.”