To use ASX BookBuild, or not to use ASX BookBuild…
That is the question. And it’s one that many companies and investors are able to reconsider as a result of the launch of ASX BookBuild (ABB). The process breakdown of the tool used by brokers and investment banks can be found here.
Not surprisingly, the advent of ABB has sparked a debate between different parties, and it’s usually a case of following the money to work out what’s going on.
On the plus side, the ABB process creates an initial public offering mechanism similar to the everyday share market, where prices for shares will fluctuate in response to demand. Theoretically, this auction-based method will provide firms with the best price for their shares as all investors (not just those of a particular broker or investment bank) will be able to bid and everyone will be able to see the auction price live (both issuers and investors). Issuers can initiate book closure via a random timer when they are satisfied with the price (this prevents last-minute withdrawals of bids or bidders waiting until the last minute to bid what they really want without allowing time for the market to respond).
Auctions, which are theoretically the best way to discover the fairest price for an allocation of shares, aren’t always that in practicality. One only needs to observe the market to see large divergences between share prices and their respective values – and this is especially true during periods when the share market is booming.
On the other hand, is it a fair process if some market participants are given exclusive access to new IPOs? Notably, this creates a greater level of involvement for investment banks and brokers, and results in higher fees. While investors and the media may balk at the large sums reported to be earned from these processes, however – it’s notable that as a result of their work, vast quantities of research and analysis are conducted, which helps broadcast the true value of the firm. In addition, vendors in the IPO process may get some surety of price; and management may be able to favour certain initial shareholders.
Whilst the ASX BookBuild process doesn’t entirely exclude these institutions, it’s quite clear that IPOs won’t be nearly as lucrative for their profit and loss accounts in the future, therefore resulting in less incentive for them to engage in these efforts.
It’s probably a futile pursuit nonetheless to find a selling mechanism that will price IPO securities to perfection. The question moreso becomes: which method is fairer for the large majority of market participants; and additionally: which method is the most appropriate for selling a publically owned asset such as Medibank private (which is reported to be offered for $4 billion)? Alan Kohler has weighed in on the debate, providing the example of the IPO of the UK’s Royal Mail. In his article, Kohler notes (as do other sources) that the IPO appeared to be £1.2 billion underpriced (as it rallied 39 per cent on the first day). Whilst this was an excellent return for the IPO participants (many of whom were clients of the investment banks involved), the UK taxpayer theoretically missed out on a £1.2 billion windfall.
It can be argued that the managers of this IPO are professionals, but as they don’t possess any crystal balls, they’re unable to know what the result of the first day in trading will be. It’s also possible that public floats can also, to a degree, be quite different in nature compared to more common private floats, hence resulting in differential pricing. I would note that since being listed at 390 pence, the share price is currently 405.5 pence; quite close to the delisted IPO price.
I won’t weigh in on either side but like Kohler, I wonder what this means for the IPO of Medibank. In the national interest of course, I want the best price possible.
All I can do as an investor is to review the prospectus of this and other IPOs, examine the outcomes the current system provides, and consider whether an auction methodology would work better. Time will tell.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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LUCAS
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Agreed w/ the above.
But you also need to discuss the darker side. There’s a reason why you get a lot of people trying to build a book.
If you can get a lot of co managers on something, and you get a lot of people involved in the process, what you’re doing is finding a way to get better distribution but also to stoke up demand.
If you can get a book oversubscribed, which is what everyone does whether its IPO or bond issuance – you ramp demand and you engineer the pop.
For example Kenya recently had a bond bookbuild process that was 4x oversubscribed. Is that a function of appropriate demand or is it just that insto’s are getting fed that the fundamentals are ok and credit profile is ok, therefore you should bid into it.
FI money is smart money 9/10 so you’d assume that it’s more a function of demand being herded towards something. IF you are bidding into something and you miss out, if you try to pick it up on the secondary market – basically the issuer wants to take as much money off the table with the IPO but leave enough demand there to engineer a pop to keep those who were funneled in happy.
The secondary markets become the realm where things are priced properly because real Demand and Supply meet. The IPO is a sandbox where faux demand vs a semi-nebulous supply come together to kind of meet a match where every party has to try to come away feeling like they didn’t get screwed over at the party.