The history of IPOs

20th December 2011

But eighteen months ago – in summer 2010 – there was talk of the Ocado initial public offering fetching 275p a share.  In the event, the firm, run by former Goldman Sachs staff, got it away at 180p.  It is now worth around 60p a share or just one third of the starting price. Why was it ever worth 180p?  What was the business model that so inspired investors when it was known that its best market – dealing with Waitrose customers within the M25 – was due to disappear as the supermarket took home delivery in-house (which it already had done outside the London area)?  

Disappointing IPOs continue to abound in the online sector.  Last week US games maker Zynga had a disappointing start to its quoted life – anyone who bought into the IPO is now some 10% poorer. Coupon provider Groupon has struggled to stay over its $20 launch price with one analyst calling it an "overgrown toddler ." Linkedin did better – the price doubled on day one and it is still some 40% higher.  But there is sufficient talk of Internet bubble 2.0 to make investors uneasy.  

Outside the world wide web, commodities trader Glencore continues to disappoint. Last May's 530p IPO is now a 383p share price – it has sunk as low as 340p although there was a brief profits window when it rose to 560p in the days following the launch.

Many analysts advised against Ocado and against Glencore. But with Glencore going straight into the FTSE100 – and Ocado in the 250 – index tracking and similar funds had to be these stocks, whatever the fundamentals. 

Pension and other investment funds have been angry for some time over the ease with which companies can gain a market quote while only releasing a small amount of their stock ( the "free float").  This has been as low as 15% meaning that in many instances trackers have to buy in a limited market, forcing the price up, only to see it fall back to more reasonable levels in a short time.  There are also questions over corporate governance at some firms with low free floats. Research from consultants Grant Thornton shows that just 17% of FTSE350 companies with a free float under 50% comply with the UK Code on Corporate Governance.

The funds have had some success in pushing up the minimum free float to 25%. Now many want it raised to 50% before a listing can go forward.  

One upon a more innocent time, IPOs were known as "flotations".  The theory was to get the shares successfully onto the stock market by "leaving something for the next man."  So pricing was far from aggressive – vendors worked on longer term growth.

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