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On the face of it, the initial public offering (IPO) market looks healthy – 659 firms have listed on the LSE in the last two years. But is it really?
The problem is that few of these listings have been in what the market considers ‘quality’ firms. Of these 659, 538 were listed on Aim and many have been small financial firms or volatile exploration companies. Worse, of the many listed on Aim since the beginning of 2004, only 27% have outperformed a similarly structured basket of stocks listed on the main exchange, says Friedel Rother on Reuters. So what’s going on?
The answer, say Jonathan Ford and Chris Hughes on Breakingviews.com, is that “stable, mainstream businesses are often snapped up by buyout firms before they get to market”. So only the more speculative firms end up floating, something that investors are aware of and that means they won’t pay top-end prices for new issues: they know that the cream of the crop has already fallen into private-equity hands and as a result are significantly more selective than they were two years ago.
Add to that the onerous regulations of listing, and some companies are no longer tempted to take the plunge into the market. Look at Phones4U, which is thought to be worth about £1bn. Its owner John Caudwell has decided to sell it privately rather than listing because he wonders “why go through all the trouble of an IPO”?
The complete picture looks like bad news for the IPO market, say Ford and Hughes. Investors have long worried about buyout firms poaching the best managers and snapping up decent quoted companies from the market. Now they have to worry about them taking out the IPO market too.
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Annunziata Rees-Mogg
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