The IPO market is gaining momentum. Just two weeks ago
Ferrari announced an IPO. Now Neiman Marcus wants to go public. Both are big
players in their respective industry.
If you don't know what Neiman Marcus does, just take a
look into the wardrobe of your wife. Yes, they sell clothes. Check her shopping
bills and you'll see what kind of clothes. Neiman Marcus is a luxury fashion
retailer. Almost 40% of customers have a median household income of more than
$200,000.
An IPO is one of the critical milestones in a
company's history. On the one hand, going public grants access to an additional financing source, which is great if the company has many projects and a
promising growth potential.
On the other hand, there will be more people having a
stake in the company and the management has to take care not to send unfavorable signals to the equity markets. Pleasing shareholders isn't always easy,
especially if business is not going well.
When a company goes public, there will be an offer price at which investors can buy. The question is, is that price higher
or lower than the actual value of the company?
As is so often the case, investment bankers of course have
their fingers in the pie. However, it's not like some crazy bankers are pulling
any price out of their a**. No, they apply sophisticated financial models
during their valuation process in order to arrive at the fair value of the IPO
firm.
Did you get the irony? We all know it doesn't work
like this. That “fair value” is not really “fair” and they often pull it indeed
out of their a**, at least partly.
Usually, they use multiples valuation, discounted cash
flow models or dividend discount models. Science has proven that none of these
models is superior; all are equally biased. In the end, it depends on the information which bankers factor in their models. So they can influence
the outcome of that “fair value” calculation quite a lot.
The thing is that banks have their own incentives. I assume
that none of you really believes that fairy-tale anymore that bankers are 100%
genuine advisers.
The business relationship between the client and the
bank is mostly limited to the IPO event. However, banks maintain long-term relationships with institutional investors, because they hope to hook
up at other occasions as well. Hence, banks have an incentive to keep IPO
prices lower than the “fair value,” in order to kiss the a** of their buy side
buddies.
So the “fair” value is mostly biased and on top of
that, bankers apply a discount, which is often not fully recovered during the
IPO pricing process.
That's why underpricing is very
common, which makes IPOs attractive for investors. If a company is sold under
its real value, the probability is high that prices will go up after the
IPO.
Regarding Neiman Macus, here is a word of caution: The
management has filed with the SEC without any underwriters.
Hence, they are not yet paying banks to advise them. This is very unusual.
There could be two reasons for such a move.
First, Neiman is owned by Ares Management LLC, a
private equity firm. They might have the guts to go for it alone.
Second, they might not seriously plan to go public.
Filing with the SEC might be an attempt to reach out to potential acquirers.
Take a look at their company history. In 2013, they announced an IPO but then
the owners sold the company. That might be a dual track strategy? We'll see...
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