Snapchat’s IPO
PRICING large initial public offerings (IPOs) is not an easy task.
While in theory it is left to market forces, the whole price discovery process is a complex one. Issuers want maximum value while investors want the opposite i.e. the lowest valuations possible.
Coming to that magic price that all agree upon becomes more difficult the larger the issuance it seems. There have been a number of large IPOS which have failed to perform.
In Malaysia also there are some IPOs that have failed to perform up to expectations so far.
Some quibble that Lotte Chemical Titan Holdings Bhd falls into that category as the listing has not taken off as wellas expected despite the cut in the share price and fewer number of shares issues.
However to the naysayers, the verdict is still out there for Lotte Chemeical. Its business fundamentals are real and earnings are visible. It is in the downstream oil and gas business which benefits from the low oil prices.
If many care to remember, Westports Bhd also did not perform well for the first six months after its listing. Now nobody talks about thta any more as the stock price is well above its listing price of RM2.50 per share.
Lotte Chemical is very unlike a tech company such as Snap, which operates the messaging app, Snapchat.
In the case of Snap, the lead investment bank responsible for its listing, Morgan Stanley, has conceded that the business model is not panning out the way it expected.
On Tuesday, the Financial Times reported that the banking giant, which had led Snap’s US$3.4bil public offering, downgraded the stock less than five months after listing it on the New York Stock Exchange, admitting it had been wrong about the messaging app company’s ability to grow advertising revenue.
Morgan Stanley had cut its price target of the stock to US$16 from US$28 previously. Snap’s IPO was priced at US$17.
No surprises shares of Snap came down by as much as 8% to US$15.66 after the bank downgraded the shares.
The banking giant’s analyst in its report said that it has “been wrong about Snap’s ability to innovate and improve its ad product this year”, while competition from Instagram was increasing.
Lead underwriters’ role is to guide companies through an IPO process and help determine its initial stock price. They would have a better understanding and insight of the company compared to others.
To be fair, Snap shares had surged to a high of US$29.44 a day after its public debut.
But a change of stance not too long after its listing begs the question of whether it had been over-priced at its IPO to begin with.