Thursday, June 28, 2007
As I write, Blackstone is now trading at $30.32 per unit, slightly below the initial public offering price of $31 a unit. And many a commentator is now saying the completed ipo is not a success because the trading price is now below the initial offering price. But is this right?
It is certainly not typical. Most companies experience a sharp rise in their share price on the first trading day of their ipo. According to data prepared by Jay Ritter, this rise has averaged approximately 19% since the 1960s. But it has varied greatly over the years: averaging 21% in the 1960s, 12% in the 1970s, 16% in the 1980s, 21% in the 1990s, and 40% in the four years since 2000 (mostly due to the inclusion of the last years of the technology bubble).
But is this really a good thing? Isn't this rise a sign that these ipo shares were underpriced, the sellers simply leaving money on the table? Certainly public perception is that the rise is such a good thing; who can forget those internet bubble days when the latest offering popped more than 100% and the masses cheered. But, this begs the question as to why sellers would repeatedly and deliberately leave money on the table. And this is a question that is one of the great puzzles of corporate finance. There is a great deal of literature on this subject, and theories can be grouped into four different explanations: asymmetric information, institutional reasons, control considerations, and behavioral approaches. According to Alexander Ljungqvist "[i]nstitutional theories focus on three features of the marketplace: litigation, banks’ price stabilizing activities once trading starts, and taxes. Control theories argue that underpricing helps shape the shareholder base so as to reduce intervention by outside investors once the company is public. Behavioral theories assume either the presence of ‘irrational’ investors who bid up the price of IPO shares beyond true value, or that issuers suffer from behavioral biases causing them to put insufficient pressure on the underwriting banks to have underpricing reduced." For more on these theories see Alexander Ljungqvist, IPO Underpricing: A Survey.
But with no agreed explanation for persistent ipo underpricing, ultimately, a successful ipo becomes one of perspective. For Peter Peterson, the senior chairman of the Blackstone group and who is retiring, the lower price is yet another good deal. He has sold his shares and reaped $1.9 billion appearing to leave very little money on the table. But for those who bought into the ipo on the first day, his gain has come at their expense.