We often hear about new issues being pulled at the last minute because of a change in investor sentiment. Sometimes this is seen as an excuse due to a lack of demand for shares while other times it does seem to be a valid reason. Unless you are involved in the day-to-day gauging of investor sentiment and the requirement for perfect timing for new issues it is difficult to understand the potential downside of mismanaging a new issue.
IPOs/New issues
IPOs/new issues often take the form of a company coming to the market whereby the original shareholders will sell part of their holding to create a liquid market. There are other occasions where original shareholders may retain their shares, or sell part of them, while the company issues new shares as a fundraising exercise. Therefore, it is not difficult to see how a particular change in investor sentiment, whether positive or negative, can have a significant impact upon the pricing of a new issue and the potential level of funds raised.
Loading the gun, ready to fire
The vast majority of new issues will have been rumoured for weeks or months in advance of the actual float date. What you tend to see is a relatively short period between the confirmation that a company is to float on the stock market and the first day of dealing. This ensures that there is as small a timescale as possible during which investor sentiment can take a downturn. Bizarrely, if investor sentiment takes an upturn during this relatively small window of opportunity this is not necessarily a worry.
Each and every new issue/IPO listed on stock markets around the world wants to hit the headlines, attract a healthy premium on the first day of listing and keep the interest of investors during this often difficult transformation period. So, if all of a sudden investors have renewed appetite for a particular IPO this can be extremely helpful even if in hindsight the company’s advisers may have been able to squeeze a few more dollars from investors.
Keeping up the momentum
Unfortunately, many new issues on the stock market are listed in a blaze of glory but not always able to live up to their promises and keep momentum going. Companies such as Snap (the parent of Snapchat) was one such company, it floated on the market in a blaze of glory and saw the share price nearly double in the first few days. However, concerns about competition from the likes of Facebook and the expiry of further lock-in periods, allowing founding shareholders to reduce their stakes, led to a significant fall in the share price.
While not always possible, it is advisable to keep “some good news back” when launching on the stock market. Let the first blaze of interest ignite and then gently feed the market more positive news, perhaps new services, new products and new trends in usage (vital for social media related companies).
It is easy to underestimate the power of investor appetite and investor sentiment. When you are talking about companies valued in the tens of billions of dollars, a downturn in investor sentiment could literally reduce the value of a company by billions of dollars. Even though financial advisers in the IPO/new issues industry are “well remunerated” theirs is not a role for the fainthearted!