Are American Underwriters Cheating China?

It's not too often that you see a CEO openly call out the lead underwriter that just took his company public, but that's exactly what E-Commerce China Dangdang (Nasdaq: DANG  ) did over the weekend.

Guoqing Li, CEO of the fast-growing online retailer, feels that Morgan Stanley (NYSE: MS  ) left money on the table by pricing shares too low. He vented on SINA's (Nasdaq: SINA  ) Weibo, China's trendy micro-blogging website that's rapidly emerging as China's Twitter.

"I am here openly criticizing investment banks, criticizing Morgan Stanley," wrote Li, as retold by The Wall Street Journal's Digits blog. "What? Morgan Stanley can't be criticized? Not be cursed? You foreigners' flunky!"

Li's anger is understandable. Morgan Stanley initially expected to price the offering between $13 and $15 a share. It bumped the price to $16, but that wasn't enough. The stock opened at $24.50, closing at $29.91 on its first day of trading.

Both E-Commerce China Dangdang and Li -- who sold off a piece of his stake in the IPO -- could have collected tens of millions of dollars more apiece had the stock been priced closer to what the first public buyers were willing to pay for the parent of Dangdang.com.

"I regret not giving the job to Goldman Sachs," Li ultimately lamented on Weibo.

Be careful what you wish for, Li.

You too, Youku
Youku.com
(Nasdaq: YOKU  ) went with Goldman Sachs (NYSE: GS  ) as its lead underwriter for a deal that priced the same day as Li's company. Goldman Sachs figured that the popular Chinese video site would hit the market between $9 and $11, but it ultimately distributed the shares at $12.80.

Good one. China's leading video-sharing website opened at $27, an even bigger pop than E-Commerce China Dangdang.

It's not fair to single out Morgan Stanley and Goldman Sachs as underachievers on hot Chinese IPOs. Merrill Lynch led ChinaCache's (Nasdaq: CCIH  ) offering at $13.90. It ended its first day trading at $27.15. Credit Suisse priced Mecox Lane (Nasdaq: MCOX  ) at $11. The e-tailer's first trade clocked in at $17.50.

The initial trading day pops may make for good headlines, but it means that the IPO buyers are the ones profiting from the poor pricing at the debutante's expense.

It's not a perfect science. China birthed many of last year's hottest IPOs, but there are a few of them that are now underwater. Either way, underwriters are failing.

The search for accountability
Closer to home, the reactions to Li's comments appear to be similar to how Hollywood starlets were being cut down by Ricky Gervais during Sunday night's Golden Globes.

Did he just say that? Why is he biting the hand that feeds him? Did he have to be so blunt?

Some are even hoisting up Li as a cautionary tale for other CEOs to be wary about what they post in public.

Really? Well, I think Gervais was hilarious, and I think Li has every right to fume out in the open. He and his company are out a good chunk of change on Morgan Stanley's pitiful deal pricing.

We often mistakenly measure successful IPOs as the highfliers, when in reality it would be a debut that opens and closes a few reasonable upticks from its initial pricing. Let the eventual quarterly reports and news sort out the winners from the losers. If investment bankers are this bad at pricing new issues, would you honestly trust their investing advice?

We'll get a chance to judge the underwriters again as Facebook, Groupon, Pandora, and LinkedIn stage likely IPOs over the next year or two. We'll see if they're as bad at bumbling stateside dot-com darlings as they did Dangdang and Youku. Either way, it's time to hold them accountable for the money that many of the top firms are leaving on the table.

Li the way.

Did you buy any of 2010's hot IPOs? Share your thoughts in the comment box below.

Sina is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz has been a fan of China's high-margin online stocks for a long time. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.


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  • Report this Comment On January 26, 2011, at 1:22 PM, Nahzuul wrote:

    Saying that Morgan Stanley was "wrong" simply because the stock price shot up is unfair--and may even be inaccurate. I am not saying Morgan Stanley was right, but that you didn't provide enough information to back up your conclusion. We all know the market is not always rational. Stocks, especially IPOs, often trade on emotion. Unless you can measure that, or logically and mathematically show where Morgan Stanley went wrong with their numbers, the criticism seems to come more from a lack of understanding of what can happen with an IPO, than from any thoughtful analysis. Did you state what the IPO price should have been before it came out? Do you have a track record of pricing IPOs that is public and verifiable? Can you show us the mechanics of pricing an IPO and then assure us the market will treat it just so? You can price it logically and perfectly--and then the market can decide not to treat it that way. Everyone has a right to an opinion, but opinions based on perfect hindsight about events that were not predictable aren't worth much.

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