The Future of IPO

Research shows that IPOs are far more likely when valuations are high than when they are average or low. They seem to be fixtures of a bull market an offensive strategy, often cynical though some would say that IPOs follow up markets more than they forecast down markets.

But why, for example, did Goldman Sachs decide to cancel its planned IPO as the market turned down in the late summer of 1998? Because the market no longer supported a valuation above what the insiders considered the investment bank to be worth. But as with any IPO, that implies that they were previously planning to sell it for more than they thought it was really worth and that potential buyers were getting carried away on a wave of overconfidence and overselling.

So IPOs should be treated as suspect. A simple trading rule is that if they start selling below the offer price on the first day of settlement, you should stop buying them. And if you are unable to acquire them at the offer price, the deck is stacked against you.

Otherwise, flip to your heart's and wallet's content. But buying new issues should be no different from investing in existing quoted companies, with decisions made on the basis of as much knowledge as you can accumulate on company and price. Supply is always likely to outweigh demand, so you can be highly selective.

Will IPOs be launched over the internet in future, and might that make them more accessible at a reasonable price to the private investor? Certainly, electronic trading is growing many times faster than conventional trading. But the potential for electronic IPOs will be greater when electronic brokers can overcome the traditional resistance of blending conventional selling groups with electronic commerce specialists. At the moment, there are regulatory impediments in the United States that presume new issues will be offered state by state to meet blue sky regulations rather than globally; and paper prospectuses have to be issued, which contain outmoded information compared to what a machine could do in real time.

Electronic IPOs today look more like regular issues with machines rather than telephones. They present only a modest adaptation of the old-fashioned system and maintain the normal agency price structure. However, when there is a combination of market pressure for lower costs, a regulatory framework designed for the advantages of computers and high quality issuers who demand the best technology for their issues, we shall see global electronic IPOs with an open market book, fully disclosed interests and real-time corporate information at issue costs at tiny fractions of money raised.