Why IPO’s Are Bad Investments

Most of the sages of investing advises not to invest in an IPO. The main reason is that, information about the company is limited and there are a lot of people involved skimming at the top. The first reason is that, the seller of the IPO, the insiders and the brokers on the sell side, know more of the company than you, the buy side retail investors. When this gap of knowledge exist and you are the one who have less knowledge, competition dictates that you should not play a game that is rigged in their favor. The second reason, there’s a lot of people taking fees, which pushes the price up before the IPO, this also involves insiders wanting to cash in their chips.

Haven’t you noticed that IPO’s depends on a roaring bull market? Didn’t you notice that most companies postpone their IPO if there are bear markets? IPOs are successful when people are optimistic about the future. If people are optimistic, they pay higher price. If they are willing to pay a higher price its not a good investment for a value investor.

Sure, there are unicorns out there. If you bought Facebook, Amazon or Google on their IPO, you got rich. But how many times would you need to get that right, picking the unicorn out of all the hundreds if not thousands of IPO’s year after year. What’s more, the bulk of the huge returns of those unicorns came years after. Are those IPO investors who wants a quick windfall be able to wait 10 to 20 years for an Amazon to show its glory?

Melco Resorts and Entertainment (MRP)

Let’s take a look at a real life example of why IPOs are hardly good investment for the long term. Here we have MRP, the owner of City of Dreams. They made a debut on the PSE for P14 a share (technically a Follow On Offering from a backdoor listing), five years ago, in 2013. People who “invested” in the IPO saw their holdings go up on the day of the debut to as high of P22 per share. And experience a rollercoaster ride holding the stock for years. Even to as low of P1.2 per share. Long term investors who believed in the company growth story may be disappointed to know that the company is planning to delist and offered a tender for P7.25 per share.

So you bought at IPO of P14, trusting the management and company even without earnings, and when you started earning, you take it private and offer your investors (who believed in you) half of what they paid for (P7.25).

Details of the unfair delisting found here:

So you really need to know the company, the management and the integrity of the management. If you invested in MRP from IPO to its delisting, you lost -50%. Without any chance to make money during those 5 years. Since it only breached the IPO price of 14 days after the IPO, after that, you will never see profit ever again on your investment.

Update Sept 26, 2018:
The company replied clarifying the news of unfair tender. What caught my attention was the 2 and 3 items on the disclosure.

  1. The Php 14 follow-on offer price was determined based largely on market demand for the investment resulting from a marketing process conducted by international investment banks. Specifically, it was the result of a book building process and discussions among the Company, MCE (Philippines) Investment Limited (the selling shareholder) and the Joint Lead Managers of the offering.
  2. As stated in the Tender Offer Report, the Php7.25 tender offer price was independently determined by the offeror MCO. This falls within the fair value range calculated by FTI Consulting Philippines, Inc. (“FTI
    Consulting”). FTI Consulting is accredited by both the PSE and the Securities and Exchange Commission, and was certified as independent by the PSE for the purpose of issuing a fairness opinion. We note that in preparing its fairness opinion and supporting valuation report, FTI Consulting complied with the Guidelines for
    Fairness Opinions and Valuation Reports of the PSE.

The entirety of the disclosure can be found here: http://edge.pse.com.ph/openDiscViewer.do?edge_no=d04a38fce639ad3f43ca035510b6ec2b#sthash.KEMdQVdC.dpbs

So what the disclosure says is that the tender offer of 7.25 is a fair market price for its share, using the services of consultants and experts in the field. That can may be true. And I could agree. But my point remains, the IPO price is not fair. The one factor that greatly determines if you’re going to be a successful investor is the price you paid. So basically, what they are saying is that, its ok to sell to the public an overpriced share on offering, but I’m going to buy it back at fair price. 🙂

Update October 5, 2018:
There is a new progress regarding the “Fairness of the Tender” and the details can be found here.

I think MRP made a point regarding the fairness of its Tender. It is no doubt a fair value of the current business. And it would be unfair for them to ask the same kind of premium when they made the FOO. But the question is, is it fair when they made a public offering (FOO)? Because there lies the problem. You can evaluate a company tendering its shares, and evaluate it on the FOO. Most companies would try to put a premium price when FOO, because they want to maximize the capital raising. On the other hand, the Tender, may be cheap or it may be fair. But the problem for the investor is still, buying at a premium on FOO. I don’t think that MRP is to blame for that. Its just that investors should be wary of capital raising, equity selling and adding of shares in the public market.

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