This week's highly anticipated initial public offering was heavily oversubscribed. I'm referring to commodities producer/trader Glencore, which listed on the London Stock Exchange yesterday. Meanwhile, on this side of the pond, the shares of social networking website LinkedIn
LinkedIn was smart to cash in first by becoming the first social networking company to go public. The structure of the offering all but guaranteed an overvaluation of the shares. Not only did its first-to-market status create scarcity value, but its offering amounts to a small percentage of the shares outstanding -- fewer than 10%. Scarcity value squared, in sum. A massively oversubscribed IPO may be good for bankers and the companies they take to market, but it is the enemy of value-conscious investors.
It's back to 1999!
As a result, LinkedIn shares more than doubled from their $45 offering price, ending their first day of trading at $94.25. That values the company at 31.1 times its trailing-12-month revenue. For reference, at the end of its first day of trading in August 2004, Google's
LinkedIn is a real business with a competitive advantage from its network effect. The more people who join, the more valuable its network becomes to individuals and companies. But that doesn't justify paying any price, however high, for its shares. Investors who get in at these levels will almost certainly experience very disappointing returns -- with a significant possibility of a permanent loss of capital. (Fellow Fool Rick Munarriz offers his own viewpoint here.)
Glencore: Don't buy when the smart money is selling
The Glencore IPO didn't exhibit the same sort of eye-popping multiples today, but investors should be wary all the same. The executives at Glencore are financiers and traders. They make their money trading commodities. That suggests a keen sense of timing, and it certainly makes sense to list their shares after a period in which commodities have done spectacularly well across the board (notwithstanding the recent volatility). When smart money sells something, the people behind it usually feel like they're getting at least full value for it.
The same skepticism applies to private equity firms that go public. Their executives make a living buying and selling companies -- why would you expect them to sell shares in their own company at anything less than a full price? Buyout firm Apollo Global Management completed its IPO at the end of March. Shares have not performed well relative to the broad market, but it's too early to draw any conclusions from that. However, as the following table demonstrates, the performance of alternative asset managers (LBO firms and hedge fund managers) could charitably be described as mixed:
Annualized % Total Return since IPO
Performance vs. S&P 500
Performance vs. Financial Select Sector SPDR
The Blackstone Group
Och-Ziff Capital Management Group
Fortress Investment Group
|Apollo Global Management||(36%)||(38%)||(12%)|
Source: Author's calculations based on data from Yahoo! Finance.
*As of May 17, 2011.
**Acquired by MAN Group on Oct. 14, 2010.
In that context, investors should probably pass on two future listings of investment firms: Private equity giant The Carlyle Group could be planning an IPO, and distressed debt investment firm Oaktree Capital Management wants to transfer its shares from a private market organized by Goldman Sachs to the New York Stock Exchange.
Exuberance is alive and well
Beyond the merits of each specific transaction, a trend of listings by investment/trading firms and a tech listing that brings us back to the glory days of 1999 suggests there is a measure of exuberance in the market; these firms would only choose to sell shares in a buoyant market. Blackstone's IPO in June 2007 marked the top of the credit bubble. Will these IPOs usher in a correction in stocks?
Watch This Before the Market Crashes and find out which company is "the next Intel."