Is Man Utd following Facebook as a flotation failure?

10th August 2012

The setback for the initial public offering (IPO) has disappointed the club's fans. It had been set to sell shares for between $16-$20 each, but cut them to $14 late on Thursday following negative comments from Wall Street analysts, reports the Guardian.

This follows Facebook's ill-fated debut on the Nasdaq stock exchange in May, which saw the social network's much-hyped share sale prove a bust with shares sinking far below their IPO value.

Wall Street analysts have warned they believe United's sale too could be a disappointment. "I'm calling this son of Facebook," said David Menlow, president of the research firm IPOfinancial.com. There are doubts over the club's debts and how they intend to grow as a business.

So why the high stock value?

For most of us, the only real exposure we have to the IPO process occurs a few weeks prior to the IPO, when the media reports flood in.

But how a company gets valued at a particular share price is relatively unknown, says Investopedia.

"Like any sales effort, a successful sale hinges on the demand for the product you are selling – a strong demand for the company will lead to a higher IPO price. Strong demand does not mean the company is more valuable – rather, the company will have a higher valuation."

So a lot depends on timing and hype. An example is the massive valuations of IPOs at the peak of the tech boom and their subsequent failure.

Let's take a look at Facebook for comparison

According to Time Business, Facebook's bankers, led by Morgan Stanley, priced the offering too high following numerous reports about the intense demand for a slice of the social network.

The IPO was oversubscribed, causing Facebook and its underwriters to raise the offering price from a low of $28 to $38 per share and also increase the number of shares sold.

S by the time the offering reached the public, it was already overpriced, with insiders bidding up the company's stock price, leaving little upside for public investors. This should serve as a warning to investors.

Psyfi blog, also a blogger on Mindful Money, says here: "Overall, as most seasoned private investors know, the IPO market is fraught with problems. 

"Whether these are caused by the use of institutional inside information or private investor mass behavioral mania is pretty much irrelevant; the net effect is that it's difficult to figure out the intrinsic value of such corporations in the wake of an IPO and most private investors should steer well clear until the situation has stabilized."

Steering away from heavily hyped IPOs

After all, an IPO is for a company rather than an investor, as it allow companies to raise capital to grow their businesses – you might be able to buy a slice, but think carefully before doing this. The average investor can, if they wish, take a slice through a mutual or index fund rather than individual shares anyway.

"The I.P.O. system only works if it preserves a balance between public and private investors," writes the New Yorker‘s John Cassidy. "If this balance is upended, and virtually all of the rewards are reserved for insiders, ordinary investors will refuse to play the game. A dearth of I.P.O.s would hurt insiders along with everybody else."

Lessons from history

Some, of course, are profitable. For example, if you'd bought stock in Microsoft when it went public in 1986, you could've made a small fortune. That's assuming, of course, that you held onto all your stock and just let it ride without making any changes to your position.

But for every successful IPO there's at least one more that debuted to loads of fanfare but failed to perform.

Bloomberg last year did a study on the 25 hottest IPOs of 2010 and 2011, and discovered that 20 of them–a full 80%–fell an average of 50% from their offering price.

Turning back to Man Utd, the lowering of the debut share price suggests the club could not find buyers at the higher prices.

The shares will pay no dividend, and some analysts say that floating just 10% of the club does not give institutional investors enough of a return opportunity, reports the BBC.

It is likely to only be hedge funds or wealthy super fans who take a slice when it goes public. And if you're thinking about it, think again.

 

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