IPO – no longer the lottery it once was


  • Business
  • Saturday, 01 Feb 2003

By ERROL OH

THERE was a time when the surest and quickest way to make money in the share market was to get in at the initial public offering (IPOs) stage. 

Of course, back then, that meant scrambling for the prospectuses and forms, and keeping your fingers crossed that you would get lucky during the balloting. The idea was to make a killing by selling the shares once the prices ballooned. 

It is different now. There is rarely a rush to subscribe and in some cases, the issues have been under-subscribed. 

That is not all. In a December report on the 44 companies that made their debut on the main and second boards of the Kuala Lumpur Stock Exchange (KLSE) last year, online investment adviser Surf88 found that the share price performances had been uninspiring. 

On Dec 20, about half the counters were trading below their IPO prices, with the discounts going as high as 63 per cent. 

“The realisation has set in. People now know that an IPO is no longer the lottery it once was. It’s not the ultimate punt,” says Minority Shareholder Watchdog Group chief executive officer Yusof Abu Othman. 

“If you want to become a shareholder at the IPO stage, you have to be prepared to be one for the long term.”  

There is no mystery here. For one thing, the global economic uncertainty dampened investor interest and the KLSE was terribly sluggish then. 

But that is only half the story. Market-watchers say the underlying theme is that investors are reluctant to bet on the new names, especially in these tough conditions. 

There is also the notion that the sunny pictures painted by prospectuses may well be the result of business naiveté or overenthusiastic salesmanship, or both. 

It does not help that there have been a few high-profile cases of companies sinking into difficulties not long after going public. Tat Sang Holdings Bhd and TimedotCom Bhd are among them. 

The Surf88 IPO scorecard notes that based on the latest quarterly results, 13 companies are likely to fall short of the profit forecasts in their prospectuses. 

If indeed they fail to meet the forecasts, the companies will probably blame the economic conditions. But analysts say this is hardly a convincing excuse. 

Last year had been better than the year before. In any event, when preparing the forecasts, the companies should have factored in the potential difficulties they would face. 

“Also, prospectus forecasts should be realistic, if not conservative, in the first place,” Surf88, points out. “On the whole, we believe the cause of the potential shortfall would more likely be company-specific than otherwise.” 

It is clear that the IPO process needs a boost to restore the lustre. On Jan 21, Securities Commission (SC) chairman Datuk Ali Kadir told reporters that the regulatory body was considering ways to make new KLSE listings more attractive. 

One possible measure is to make shares offered to the public cheaper than those offered to selected investors via private placements. This way, retail investors who subscribe to IPO shares will already have a margin to possibly make a profit once the shares are floated. 

The SC is also thinking of publishing statistics on the price/earnings (PE) ratios of the various sectors to help investors decide if the IPOs are competitively priced. 

This is a critical matter. Ali said investors were less keen on IPOs these days because some issuers price their IPOs very high so as to maximise the proceeds. 

“They are not worried how this will affect the market later. People who get the shares suddenly find that they are not making any money.” 

“Some actually lose money, and as a result, people lose interest in IPOs. So now we have to look at it again and see what we can do,” he added. 

On the other hand, low IPO prices may be compelling but there may be problems there too. Surf88 warns that the tendency for retail investors to go for “affordable” issues may bring painful consequences. 

Ali says the SC planned to meet industry players to get feedback on the proposed measures. 

Yusof of the Minority Shareholder Watchdog Group has one item to add to the wish list. He suggests that it be made mandatory for companies to undergo corporate governance screening as part of the IPO process. 

It is a matter of looking at the companies’ preparedness to practise good corporate governance when they are listed. 

Yusof says: “Corporate governance is becoming a mainstream feature. You’ve got to approach these people (companies going for IPOs) when they want to project the best of themselves. And such a review calls for independent expert opinion.”  

He acknowledges that this will add to the cost of going public, but he argues that this can be justified because the corporate governance review gives additional comfort to potential subscribers. 

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