Buffett: Facebook Was Wrong Price or Handled Badly

http://www.bloomberg.com/video/buffett-facebook-was-wrong-price-or-handled-badly-Nx0oXWNSTNGfWNF_JKe6kg.html

Be Wary of IPOs. It's Probably Overpriced.

Do you think you can make lots of money by getting in on the ground floor of the initial public offering (IPO) of a company just coming to market?

My advice is:

• that you should not buy IPOs at their initial offering price and 
• that you should never buy an IPO just after it begins trading at prices that are generally higher than the IPO price.  

Historically IPOs have been a bad deal.  In measuring all IPOs five years after their initial issuance, researchers have found that IPOs underperform the total stock market by about four percentage points per year.  

• The poor performance starts about six months after the issue is sold.  
• Six months is generally set as the "lock up" period, where insiders are prohibited from selling stock to the public.  
• Once that constraint is lifted, the price of the stock often tanks.

The investment results are even poorer for individual investors.  You will never be allowed to buy the really good IPOs at the initial offering price.  The hot IPOs are snapped up by the big institutional investors or the very best wealthy clients of the underwriting firm. 


If your broker calls to say that IPO shares will be available for you, you can bet that the new issue is a dog. 

• Only if the brokerage firm is unable to sell the shares to the big institutions and the best individual clients will you be offered a chance to buy at the initial offering price.  
• Hence, it will systematically turn out that you will be buying only the poorest of the new issues.  
• There is no strategy I am aware of likely to lose you more money, except perhaps the horse races or the gaming tables of Las Vegas.

A Random Walk Down Wall Street
by Burton G. Malkiel

Facebook lessons: What not to do when planning an IPO

Facebook lessons: What not to do when planning an IPO

Written by Reuters Friday, 25 May 2012

NEW YORK (May 25): It's been less than a week since Facebook went public, and while the initial public offering (IPO) made CEO Mark Zuckerberg and many others very wealthy, the botched way in which the offering was done has sparked investigations, lawsuits and regulatory threats. It has also sparked a lot of anger toward the social media company, lead underwriter Morgan Stanley and the Nasdaq stock market. 

Here is a list of eight things that went wrong with the Facebook IPO — a "what not to do list" for the next big TECHNOLOGY [] company considering a public listing, compiled from interviews with investors, traders, analysts, attorneys and regulators.

1. Charge too much. Facebook raised the price of its shares above a reasonable valuation given its earnings and revenue. The US$38 (RM120) price tag was 100 times historical earnings. By comparison, Apple Inc trades at 14 times historical earnings, while Google Inc is at 19 times. Facebook set the higher price despite a slowdown in recent months in its online advertising business and its concerns about the growing use of mobile devices, an area in which its advertising revenue is still weak.

2. Sell too much stock. Facebook floated 421 million shares worth around US$16 billion at the offering price — the biggest ever US technology company IPO. As soon there were some wrinkles, supply overwhelmed demand. Many bankers were especially concerned that Facebook demanded that a larger than usual block — about 25% — be set aside for ordinary investors, who typically are more willing to flip their purchase in the hope of a quick profit. "The underwriters misjudged the amount of buy and hold demand relative to the amount of speculative demand," said Jay Ritter, a finance professor at the University of Florida, in Gainesville, Florida, who plans to hold on to the 400 shares he bought in the IPO.

3. Fall for the hype. Facebook, Morgan Stanley and others believed the hype — some of it self-generated — that the company's shares would pop 30% to 50% on the first day of trading, and miscalculated the demand. The event was "a perfect storm", according to J Robert Brown Jr, a law professor at the University of Denver Sturm College of Law in Denver, Colorado. Facebook increased the number of shares at the last minute while bad news was coming out. Then delays in the start of trading on Nasdaq and later disruptions in matching buy and sell orders "gave some shareholders time to reconsider and cancel their orders", Brown said in an email. "All of this resulted in less demand and a dropping share price."

4. Selective Disclosure. Even if Morgan Stanley and other underwriters didn't do anything illegal, they weren't upfront about what they knew about the company and whom they told. Morgan Stanley and at least three of the other underwriters lowered their forecasts for Facebook's second-quarter and full-year revenues — but the bad news reached only a small group of big clients. Smaller investors had no idea until the figures were revealed by Reuters several days after trading had begun. The company and Facebook have denied any wrongdoing, but regulators and lawmakers in Washington have opened inquiries and reviews, and some shareholders have sued Facebook and Morgan Stanley. "The main underwriters in the middle of the road show reduced their estimates and didn't tell everyone," said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. "I don't think any investor in Facebook wouldn't have wanted to know that information."

5. Have a distracted CEO. Some investors are asking whether Zuckerberg was on top of the whole process enough, given the many thousands of investors who were about to buy a slice of his company. He appeared in New York City at the company's investor road show in his trademark hoodie, failed to appear at some other road show events, and declined to hold a ceremony at Nasdaq's main New York City site in Times Square for the listing debut. He was also busy planning his nuptials — his wedding to long-time girlfriend Priscilla Chan occurred one day after the IPO.

6. Don't plan for the worst-case. Nasdaq CEO Robert Greifeld partied last Friday with Zuckerberg while the bell was rung at Facebook's Silicon Valley headquarters to kick off trading — but at just that time, a major crisis was brewing back east at Nasdaq's sites. Technical glitches delayed Facebook's debut by 30 minutes, and many buy and sell orders for hours afterwards. Nasdaq said on Wednesday that it made the wrong fix for a technical glitch, worsening the initial problem. The exchange now faces big claims for compensation from traders. "If we had known that our solution was inadequate, we would have fixed the solution with the right solution before moving forward," said Eric Noll, Nasdaq's head of transaction services. The US Securities and Exchange Commission (SEC) is now reviewing the matter, and at least one lawsuit has been filed accusing Nasdaq of negligence.

7. Avoid the Google road. Facebook sold its shares through a traditional Wall Street IPO — which is a more subjective process because it's managed by the investment bankers. By contrast, when Google went public in 2004, it issued stock through a more transparent — and democratic — process known as a modified Dutch auction. Underwriters gathered bids from investors regardless of their connections or size of their portfolios.

8. Alienate your customers. For a company that transformed the meaning of the words "like" and "friend," the events of the last week weren't so friendly. The biggest US automaker, General Motors Co, said only days before the IPO that it would stop buying ads on Facebook. The decision followed Facebook's failure to convince GM about the benefits of Facebook in a meeting in recent weeks, people familiar with the meeting said. Then the IPO problems managed to upset thousands of investors who are also Facebook customers. In a sign of the image problems it has created, the headline on one New York Post column on Thursday was: "Warm, Fuzzy Vultures", and a cartoon in the same newspaper depicted a distraught bull slumped over a computer featuring a Facebook page thinking the worst — "unfriend, unfriend, unfriend, unfriend, unfriend". — Reuters

Facebook flop hurts small investors’ trust in stocks

May 26, 2012

Pedestrians walk near the Nasdaq Marketsite at the start of the listing for Facebook in New York May 18, 2012. — Reuters pic

NEW YORK, May 26 — Just when brokers thought Mom-and-Pop investors were getting excited about the stock market, along came Facebook.

The 17 per cent plunge in Facebook’s shares since its ballyhooed debut last Friday, coupled with Nasdaq’s mishandling of opening day trading, is spooking the very investors who had seemed the most intrigued by the offering, said Wall Street executives.

“The Facebook IPO is another in a series of data points that feed concerns that the financial markets are not a safe place to be for individual investors,” said John Taft, chief executive of Royal Bank of Canada’s US wealth management division, one of 33 underwriters of the offering.

Brokerage firms have been fighting to restore investor confidence in the markets since the financial crisis of 2008, but trading volume has remained stubbornly weak. Market-shattering events such as the Flash Crash of 2010, the Bernard Madoff scam, last summer’s downgrade of US government debt and the European sovereign debt crisis have been pushing investors out of equities into cash or bonds that yield near-zero returns.

Anticipation of the Facebook IPO had created a stir of public interest in the offering and in stocks in general. Now, its failure is expected to drive more retail investors away from stocks and further depress trading volume, which lowers revenue at brokerage firms.

Investors poured US$33.5 billion (RM100 billion) of net new money into US stock mutual funds in the first quarter, according to Thomson Reuters Lipper. In the last three weeks, however, they pulled out US$16.3 billion.

“The Facebook flop didn’t help,” said Jeff Tjornehoj, Lipper’s head of Americas research.

“The perception was that something good was going on,” said Anthony DeChellis, chief executive of private banking Americas at Credit Suisse, which also had a small portion of the Facebook underwriting. “It could have gotten people interested in the next IPO, but the conversation now is, ‘You owe me because of Facebook.’”

The Facebook IPO had plenty of problems. The company increased the size and price of the issue just before the debut, and it later emerged that numerous analysts had cut their growth forecasts for the company — without telling retail investors.

One result was that despite pre-IPO chatter about a scarcity of shares, too many retail investors got a piece of the Facebook action, brokers said. Trading in the IPO last Friday made up 40 per cent of daily volume at discount brokerages, up from two per cent to five per cent historically for IPOs, according to analysts at Sandler O’Neill & Partners. So-called retail investors lost an estimated US$630 million in the first four days of trading.

New headlines showing that even Wall Street insiders got pummelled by the Facebook debut have stoked further doubts among small investors. At least four of the trading firms chosen by Nasdaq to make markets in Facebook lost a total of more than US$100 million because of systems issues in the electronic marketplace, according to one of the firms.

“It’s disheartening and very scary,” said Victoria Phibbs, a day trader from Jacksonville, Florida, who canceled an order for 400 Facebook shares through her Charles Schwab Corp brokerage account as she watched the price plummet on its opening day of trading. She learned in the evening that her order was nevertheless filled, leading to a US$1,000 loss as she sold the shares. Schwab, she said, reimbursed her commission costs.

“It’s not like when our parents used to trade,” she said, recalling a time when investors could be confident enough in the markets to buy and hold stocks for the long term. “I feel like you can’t win as an individual investor.”

Spokespersons at Nasdaq did not respond to calls for comment. A Schwab spokesman said the company has resolved most of its clients’ Facebook-related issues.

Brian Cabral, a United Airlines pilot from Topsfield, Massachusetts, ordered 100 Facebook shares through a discount broker last Friday during a layover on a flight from Tokyo to Washington, then quickly cancelled the order.

He received a “cancel pending” notice within minutes. But more than six hours elapsed before he received word that the cancellation went through, a notification he said typically takes five to 10 minutes.

“I think these types of shenanigans will dissuade people from investing in the stock market,” said the 50-year-old pilot. “You’re not going to see my generation really coming back to this market.”

RBC’s Taft said the Facebook systems glitches are particularly harmful to restoring confidence. “You can imagine the feedback we’re getting from brokers and clients,” he said. “You should be able to trust that your buy and sell orders are being filled in a timely manner.”

The securities industry is concerned that the extended drought in stock investing will continue to erode its bottom line. Trading commissions at retail brokerage firms dipped nine per cent in this year’s first quarter from a year earlier while cash balances and investments in low-yielding bonds are at unusually high levels. “Credits” reflecting cash at securities firms have grown 32 per cent in the 24 months ended February 28, according to regulatory reports.

Balances in margin accounts — a profitable lending product for brokers and an indication of investors’ risk appetites — are 10 per cent below last April, according to analysts at Goldman Sachs.

The hit to brokerage firms’ bottom lines from reduced trading has been cushioned by the growth of fee-based advisory accounts and the recovery of the broad market from the depths of the financial crisis, but brokerage executives said distrust of the markets and trading remains a problem.

“Investors are still spooked,” said Taft, a former chairman of the Securities Industry and Financial Markets Association, the US brokerage industry’s principal trade group.

That Facebook blew up after weeks of anticipatory headlines is proving to be an object lesson to retail investors.

“There is an incredible amount of empirical evidence that retail investors should not be buying IPOs,” said Henry Hu, a securities and finance professor at the University of Texas Law School. “Insiders always know more and the pricing is incredibly subtle.”

The apparent mispricing of Facebook shares by underwriters and the deal’s large float give the impression that Wall Street enjoys “squeezing every dime out of investors’ pockets,” likely hurts Facebook’s ability to sell future offerings and exposes the company and its underwriters to litigation, he said.

IPOs are subject to Section 11 of the Securities Act of 1933, which sets higher standards of due diligence than other antifraud provisions of the securities law. “Section 11 is promised land for plaintiffs’ attorneys,” said Hu, who was the first head of the Securities and Exchange Commission’s division of risk, strategy and financial innovation.

SEC Chairman Mary Schapiro told reporters Tuesday that there is still “a lot of reason to have confidence in our markets and in the integrity of how they operate,” but one of her predecessors was less cheery.

“It’s an event with long-lasting negative implications for an industry that can ill afford this kind of blemish,” former SEC Chairman Arthur Levitt said in an interview. — Reuters

Facebook IPO - The Psychology driving the Investors

Facebook is the biggest IPO ever listed in the U.S.

In the light of its recent listing, this video is a very good one to understand the psychology of IPO investing.

There are great lessons one can learn from Parag Parikh, who explains this very well.

With these knowledge, your investing will be safer.

Facebook exec ducks questions about IPO debacle

May 24, 2012

Sandberg speaks during Class Day ceremonies at Harvard Business School in Allston, Massachusetts May 23, 2012. — Reuters pic

BOSTON, May 24 — Facebook chief operating officer Sheryl Sandberg spoke to Harvard University students in her first public appearance since the company’s disappointing initial public offering, but refrained from addressing the controversy around its messy, glitch-plagued debut.

Instead, Sandberg urged students graduating this week from Harvard’s business school to work for fast-growing companies, communicate honestly and address inequality in the workplace.

“We need to acknowledge openly that gender remains at issue at the highest levels,” she told a crowd of students and their families assembled Wednesday afternoon on a lawn outside the business school library alongside Boston’s Charles River. Only about 16 per cent of the highest corporate jobs are held by women, the same level as a decade ago, she noted.

Sandberg, who visited her alma mater with her parents and two children, only once made reference to the IPO in her speech. After urging the graduates to use Facebook to stay in touch, she said: “We’re public now, so could you please click on an ad or two while you’re there.”

Asked before and after the speech to comment on the IPO, Sandberg said she not speaking to the media.

She told the crowd that she sometimes suffers from anxiety: “When things are unresolved, I get a tad anxious,” said the 42-year-old who became one of Harvard’s wealthiest alumni after the IPO. “People have never accused me of being too calm.”

She chatted and posed for photos with dozens of students after the speech. Several said they had accepted jobs with Facebook. “I’ll see you over the summer,” she said to one of them.

Facebook shares closed yestersday at US$32 (RM96) a share, 16 per cent below the price at the IPO last week. The deal was beset by computer glitches at the Nasdaq market and lower-than-expected demand from investors.

Facebook and lead underwriter Morgan Stanley were sued by shareholders yesterday who claimed they hid the social networking company’s weakened growth forecasts ahead of its US$16 billion initial public offering.

Sandberg received an undergraduate degree from Harvard in 1991 and an MBA from the business school in 1995. — Reuters

How Zuckerberg cashed in $1.13 BILLION worth of his personal shares BEFORE stock cratered - now could it end up at $10?
Read more: http://www.dailymail.co.uk/news/article-2148839/Facebook-IPO-Mark-Zuckerberg-cashed-1-13bn-worth-personal-shares-BEFORE-stock-cratered.html#ixzz1vksQbPPc

Psychology of Initial Public Offers (Understanding the IPO of Facebook)

IPO  .... It's Probably Overpriced.

The full version.

Will You Buy Facebook, the Largest IPO of All Time?

Are you ready for the largest IPO of all time? Well, you'd better be.  No matter what you choose to do with the decade's hottest IPO, you deserve as much information as possible. 


But there's more than one way to value an IPO. Most of us are more interested in how much value that initial offering places on the entire company. By that measure, Facebook is head and shoulders above General Motors and every other "biggest" IPO that's come along in recent years:



We know Mark Zuckerberg started the site at Harvard in February 2004. Now, 99 months later, it's worth $100 billion. That's an incredible amount of value to create in a relatively short time, but I didn't truly appreciate how outsized that valuation was until I compared it to these former IPO champions and the length of time each took from founding to reach the IPOs that earned them so much.



How did Facebook's tech peers begin their public lives? In every case (even Google's), far more humbly:

Apple and Microsoft were '80s kids, debuting in 1980 and 1986, respectively, but they represented high-water marks for high-tech interest in their days.

If you'd like to think that Apple was more reasonably valued than Facebook at their respective debuts, you're wrong. Facebook's IPO valuation is actually in line with many of its high-tech peers, including two that didn't wait for profitability before going public:

With the benefit of hindsight, we can see that most of these companies were bargains at the time, and continued excellence has brought early shareholders some amazing gains:

With the exception of AOL, which has fallen on some hard times of late, and Amazon.com, a longtime high-valuation stock, major tech companies that survive the ravages of age have all seen their valuations shrink and their gains explode. Google, with the least growth of the bunch, has still been a six-bagger for IPO investors. Apple has earned its earliest investors 290 times their initial investments, while Microsoft has a cumulative return of more than 33,000% since going public.

Is there anything left to "like"?

For those of you expecting huge returns from Facebook, here are a few sobering numbers to consider -- assuming, of course, a $100 billion debut that isn't pumped to the moon by rabid demand. For your investment to offer Google-like returns, Facebook would need to be worth more than $600 billion, a market cap no company has held for very long. To approach even Yahoo!'s post-IPO growth, you'd need Facebook to be worth more than $2 trillion. And to become the next Microsoft in terms of share-price appreciation, Facebook would have to someday be worth $3 quadrillion dollars. Good luck with that.

Perspective is important when considering the growth prospects of any hot IPO, and Facebook's public debut will demand it. Do you believe that Facebook can be the next Google, AOL, Apple, or Microsoft? I don't.

http://www.fool.com/investing/general/2012/05/16/will-you-buy-the-largest-ipo-of-all-time.aspx

Be careful with companies in formation - Wait For Earnings

Without Earnings, Nothing To Measure

Graham was suspicious of 'hot' or fast-growth stocks because their promise relies on the prediction of ever-increasing future earnings with little historical evidence that the company can consistently produce ever-rising future earnings.

He warned the growth stock investor to seek two things:

• Assurance that growth will continue
• Assurance that the investor isn't paying too high a price for future growth.

Peter Lynch warns investors to be especially careful with companies in formation.  "Wait for earnings," he cautions.

• Though Lynch has done very well with some initial public offerings in particular (he was an original investor in Federal Express, "I'd say three out of four have been long-term disappointments."

Venture capital operations

Many high-tech, bio-tech or other emerging technology companies operate more like venture capital operations.

Venture capitalists demand guarantees of high returns because the risk is high that earnings will be slow in arriving, or will never materialize at all.

The venture capitalist is betting on a technology and the talent to put that technology into use.

Venture capital investment is best practiced by those who know a particular industry extremely well.

How the Stock Market Works

How can I make money from Initial Public Offerings (IPOs)?

Why does a company go public?

A public company will be more closely watched by securities regulators. It also has to meet tougher reporting rules. So why would a company go public? Reasons include:

• RAISE CAPITAL

  - A public company sells shares to raise money to improve its business.

• GET FINANCING

  - Public companies may be able to borrow more easily and on better terms.

• ATTRACT GOOD PEOPLE

  - Public companies are more likely to offer stock purchase plans or stock options to keep their top employees or attract new ones.

• CREATE A STRONGER BRAND

  - A public company often gets more media attention so people get to know its brand better.

What should I ask before I buy an IPO?

• WHAT WILL I MAKE?

  Most of the time, IPOs are more risky than a stock that’s been on the stock market for a while. It’s very hard to predict how the price of an IPO will change once it goes on sale. Before you decide, read the prospectus from the company issuing the IPO. The prospectus describes the business plan and notes important risk factors. Check whether the company is making money or when it expects to become profitable.
• 
  

  WHAT FEES WILL I PAY?

  In most cases, you won’t pay any commission to buy an IPO. That’s because the company issuing the IPO hires underwriters to price and market the new stock. Underwriters get large fees for their services. Their earnings and fees are built into the price of the stock. You can’t avoid these built-in fees. However, you can make sure the costs are in line with what you hope to make.

Remember: Find out as much as you can before you buy an IPO

Make sure you know how much growth you can reasonably expect from the stock and how long you want to hold it.

Share floats: sink or swim

By Chris Walker,
Money Magazine, November 2007

Share floats, or initial public offerings (IPOs), offer investors a chance to get in on the ground floor of a newly listed company, potentially enjoying early gains if the stock performs well. But without the benefit of a history for the share price showing what the market thinks of the stock, investors need to make their own assessment as to whether a share's initial subscription price is under- or overvalued. And it's not always an easy task when the prospectus is designed to sell the company to investors.

The term "share float" refers to the first time a company is listed on the Australian Stock Exchange (ASX). Listing is a big step for any company, bringing an important injection of capital or providing existing owners with the opportunity to sell out.

The company prospectus will state an initial subscription price per share; in other words the cost of buying into the stock.

In some cases, investors can make an instant "stag" profit if the share price skyrockets once the shares start trading on the open market. This was certainly the case when fund manager Platinum Asset Management listed in May this year. Its shares closed at $8.80 on the first day of trading, well up on its subscription price of $5. All subscribers made a massive profit; by mid-October Platinum was trading around $6.20.

But profiting from floats is certainly not guaranteed. Home lender RAMS is a case in point. It had an issue price of $2.50 and a first day closing price of $2.49 in July. By mid-August, as the US sub-prime loans debacle blew up, its share price had plummeted under $1 and then there was another steep fall at the beginning of October; mid-October it was trading around 30c.

The current resource boom is dominating new floats and a swag of resource companies are going public. With plenty of blue-sky optimism, it's important for investors to do some mining of their own to assess each share's merits. Henry Jennings, senior broker with Cube Financial, says: "There are some key aspects investors need to consider with share floats. Firstly, look at what the business does. If you don't understand the business or how the company works, don't go there.

"You also need to ask why the company is being floated," he says. "It may be that the company is in need of new money, or it could be that the directors want to get out. A useful indicator here is how long the directors' shares will be held in escrow for [in other words, how long before the directors can cash in their chips]. If it looks like the directors are keen to make an early exit, the warning bells should start ringing."

It is also worth looking to see who is backing the float financially. "If the float is being underwritten by a large broking group it is usually a better-quality listing than if it's backed by a small broker," Jennings says.

The volume of capital being raised is also noteworthy. If the capital raising is small relative to the nature of the company's operations, it's a reasonable bet it won't be too long before it goes back to the market asking for more cash.

All this information should be available from the company's prospectus, but here as well investors need to exercise caution. "Be wary of being swayed by persuasive pictures and images presented in a prospectus," Jennings says. "Often photographs are included in a prospectus that imply or suggest the company has certain contracts or business connections, when in fact nothing of the sort exists."

Not surprisingly, companies see the timing of their float as critical. A buoyant market can sweep a share value upwards with the overall market mood. But as Jennings points out: "It's impossible to know what sort of market conditions will prevail when a company eventually floats. The good ones will perform well, but a lot of recent floats are struggling because of the present market conditions." A list of upcoming floats is available on the ASX website at www.asx.com.au — click on "prices, research and announcements".

http://money.ninemsn.com.au/article.aspx?id=319389

Key points
Initial public offerings (IPOs), offer investors a chance to get in on the ground floor
The current resource boom is dominating new floats
A buoyant market can sweep a share value upwards

The risks of buying into IPOs

Wednesday May 5, 2010

The risks of buying into IPOs
Personal Investing - By Ooi Kok Hwa


Investors may not necessarily make quick gains from share offerings

AS our economic outlook is getting more promising, there are growing interests from companies to list on Bursa Malaysia.

However, despite the higher number of initial public offerings (IPOs) and bigger, broad trading volumes lately, we noticed that the general public’s buying interest, especially of retail investors, in recent IPOs remains low.

If we were to scrutinise IPO prospectuses, we will seldom come across one that states the main purpose of the company seeking to go public is to share its profits with the investors. Instead, most companies would want the investors to share the risks involved in running the companies.

Hence, more often than not, the first few sections of the prospectuses will highlight all the risks involved in buying into those IPOs.

Investors need to understand that buying into IPOs does not necessarily mean investors can make quick gains. Sometimes, they may need to hold on to those investments for medium to long term.

There are two main types of share offerings:

• public issue and 
• offer for sale.

Public issues involve companies issuing new shares to investors and the money raised will be channelled into reducing companies’ borrowings or used for future expansion.

As for offer for sale of stock, the shares that investors subscribe to are from existing company owners. Therefore, the money raised from the new investors will be channelled to existing owners, which also means the existing owners will have cashed out a portion of their investments in those companies.

The Table shows how the owners of a listed company, Company A, are able to get back their original investment through an IPO. The total shareholders’ funds of RM800mil represent the total original investment cost of Company A’s existing owners.

Let’s assume Company A offers 25% of its shares to the general public (line f) and the type of offering is offer for sale. If the IPO price to book value per share is about four times (line e), the offer for sale of 25% of its outstanding shares will allow the existing owners to recoup all of their initial capital invested in the company (Line g, h and i).


Even though this does not imply that Company A is not able to perform in future, investors need to understand that the remaining 75% of the shares or 1,534 million (0.75 x 2,045 million shares) owned by the existing owners are in effect “free” to them.

If Company A is fundamentally strong with good future prospects, then investors should not be too worried about the existing owners cashing out.

However, if the fundamentals of Company A start to deteriorate, investors need to be extra careful as the remaining 75% of the shares owned by the existing owners are now costless to them. Under such circumstances, every share the existing owners manage to sell into the market, regardless of the price, is extra gain for the owners.

Therefore, the existing owners can afford to sell the shares at any price they wish. However, if the price is below what retail investors had paid, it will mean a loss to them.

● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.

http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6190058&sec=business

Buffett (2000): IPOs usually result in transfer of wealth and that too on a massive scale from the ignorant shareholders to greedy promoters.

In Warren Buffett's letter for the year 2000, he talked about how investors, in their irrational exuberance, tend to gravitate more and more towards speculation rather than investment. Let us go further down the same letter and see what other investment wisdom he has to offer.

IPO – It’s Probably Overpriced

If it is out there in the corporate world, it has to be in the master's annual letters. Over the years, Mr. Buffett has done an excellent job of giving his own unique perspective of the happenings in the business world. Whatever be the flavour of the season, you can rest assured that it will be covered in the master's letters. Since the letter for the year 2000 was preceded by the famous 'dotcom bubble' and the flurry of IPOs associated with it, the master has spent a fair deal of time in trying to give his opinion on the same. And as with other gems from his larder of wisdom, strict adherence here too could do investors a world of good.

On IPOs, the master goes on to say that while he has no issues with the ones that create wealth for shareholders, unfortunately that was not the case with quite a few of them that hit the markets during the dotcom boom. Unlike trading in the stock markets, IPOs usually result in transfer of wealth and that too on a massive scale from the ignorant shareholders to greedy promoters. The master feels so because taking advantage of the good sentiments prevailing in the markets, a lot of owners put their company on the blocks not only at expensive valuations that leave little upside for shareholders but most of these companies end up destroying shareholder wealth.

Hence, while investing in IPOs, two things need to be closely tracked. 

• One, the issue is not priced at exorbitant valuation and 
• second, the company under consideration does have a good track record of creating shareholder wealth over a sustained period of time. 

Thus, if an IPO is only trying to sell you promises and nothing else, chances are that you are playing a small role in making the promoter, Mr. Money Bags.

Master's golden words

Let us hear in the master's own words his take on the issue. He says, "We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get."

He further adds, "What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates). The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them. Too often, an IPO, not profits, was the primary goal of a company's promoters. At bottom, the ‘business model’ for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen."

To conclude, the master says, "But a pin lies in wait for every bubble. And when the two eventually meet, a new wave of investors learns some very old lessons: 

• First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy. 
• Second, speculation is most dangerous when it looks easiest."

Growth Investing: The importance of track record of Sales and Earnings

The most important driver of growth in stock price is growth in earnings.  Future earnings growth frequently depends on past earnings growth.

To convince yourself that you must look at the track record, companies that have had positive results for a while are likely to exhibit that kind of performance for years to come, especially when the management team remains in place.  Once in a while, this may not work, but on average you will come out a winner if you play the game by emphasizing a company's track record of earnings.

A short record of, say, less than five years is probably a dangerous way to identify the future growth of a company.  It is important to focus on a longer time span.  Great growth companies remain outstanding for many years after their initial spurt in growth.

Unless you know a lot about the company, it is best to avoid initial public offerings (IPOs).  The average three-year post-IPO performance is 20 percent below the corresponding market returns.  While IPOs are often marketed as growth stocks, their long-run performance has been dismal.  Generally speaking, IPOs are anything but growth stocks.

Growth in earnings does, however, depend on growth in sales, especially in the long run.  The customer is the main driver for growth in sales.  In general, it is best to keep both sales and earnings in mind when thinking about growth investing, not just one or the other.

One good approach to finding growth stocks is to identify some great products and services, as Peter Lynch has often emphasized.  Still, you must ask several questions before you actually buy stock in such companies.

Here are some qualitative questions that you should take time to ask and answer before you decide to invest in a growth stock.

Is there potential to grow sales and earnings for several years?
How are relations with employees?
Is research and development important?
How does the company respond to challenges?
Is management quality excellent?
How important are profit margins?
What is the company's Achilles' heel?

You can afford to take your time.  Great companies will give you returns of several hundred percent, and if you miss some of it in the beginning, you should still do well.

Oversea targets RM13m from ACE listing for growth

By June Ramli

Published: 2010/02/23

Oversea Enterprise Bhd, operator of the Oversea restaurant chain, plans to raise RM13.1 million from an initial public offering (IPO) to expand its business and partly settle existing debt.

The group is aiming to list its shares on the ACE Market of Bursa Malaysia by the end of next month.

The group started operations with its first "Restoran Oversea" in Jalan Imbi, Kuala Lumpur, in 1977. To date, it has seven outlets in the country: five in the Klang Valley and two in Ipoh, Perak.

The IPO involves a public issue of 56.9 million new shares priced at 23 sen apiece. There will also be an offer for sale of 9.5 million existing shares at the same price.

Funds raised from the offer for sale will go towards the seller, typically the controlling shareholder, and not the company. In this case, the seller would make about RM2.2 million.

"We believe that these strategies would go a long way in not only strengthening our brand equity but also building up a new generation of diners who are familiar with, and wholeheartedly believe in, the high quality of our Oversea brand," group managing director Yu Soo Chye said at the underwriting agreement signing ceremony in Kuala Lumpur yesterday.

About 70 per cent of the IPO funds will be used for expansion and working capital. The rest will be used to pay borrowings and listing expenses.

The group plans to open two casual and contemporary dining concept outlets targeting younger customers.

"We plan to open the two casual and contemporary Chinese restaurants in the near future - one in Ipoh this year and the other in Jakarta, Indonesia, by next year - as well as one cafe in the Klang Valley this year," Yu said.

Besides the restaurant business, Oversea also makes mooncakes and baked products like egg rolls, oriental muffins and wedding biscuits.

The group almost doubled its net profit to RM6 million in 2008 on revenue of RM62.8 million. In 2007, its revenue was RM60.3 million.

Oversea has hired OSK Investment Bank Bhd to manage its IPO.


http://www.btimes.com.my/Current_News/BTIMES/articles/jrover-2/Article/

Comment:  Restaurant business has little or no durable competitive advantage over their rivals.

Shouldn't retail investors be wary of IPOs?

Legendary investor Warren Buffett is wary of IPOs. Shouldn’t retail investors walk his path? 


“It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller to a less-knowledgeable buyer,” Buffett reportedly said on IPOs. 


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But why did majority of the IPOs fail to deliver? The usual answer from the companies and bankers will be “that’s the way market is”.Although there’s no single reason, a dominant one is the pricing as sellers try to get the maximum, which, at times may be even higher than their traded peers by sugar-coating prospects. Broadly speaking, the companies that debuted with high valuations compared to their listed peers failed miserably. 


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Most of the IPOs failed to deliver simply because they were priced too aggressively.  Besides the company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking. 

Why I usually avoid IPOs

A quick look at Kelington Group Berhad KGB (ACE)

Kelington Group Berhad Company

Business Description:
Kelington Group Berhad. The Group's principal activities are providing engineering services and general trading. It provides UHP gas and chemical delivery systems solutions that comprise of products and services, such as system design and installation, gas and chemical industry equipment, control and instrumentation, QA and QC, as well as maintenance and servicing to various foundries and clients who require UHP gas or chemical delivery systems in Malaysia, the People's Republic of China, Taiwan and Singapore.



Current Price (3/26/2010): .74
(Figures in Malaysian Ringgits)


Wright Quality Rating: LBNN


The ratings consist of three letters and a number. Each letter reflects a composite qualitative measurement of numerous individual standards which may be summarized as follows:
A = Outstanding; B = Excellent; C = Good; D = Fair; L = Limited; N = Not Rated.










Comment:
This is a recent IPO (November 2009).  
Probably better to avoid IPO in general.
Its longer term profitability and growth have yet to be established.  
Can relook after a few years when its business track record can be better assessed.




A quick look at KGB.
http://spreadsheets.google.com/pub?key=tHqBfx2E03AKh6UHmeay3aw&output=html
Once again, it is not easy to assess a newbie company.