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Bank Windhoek IPO: What does it mean

Mon, 24 June 2013 01:45
by business reporter

Before IPO takers blow their horns there might be the possible reason for the oversubscription than just being a good company or lovely share. That in itself is meaningless. IPOs are almost always oversubscribed. And they had better be or the stocks would plummet the moment they hit the market.
Whether the deal is said to be two times or 10 times oversubscribed, only one thing is certain: No one outside the lead underwriting firm really knows how accurately that reflects investor interest.
What does an oversubscription number really mean without being able to see the order book? It’s very hard to independently verify if you are not sure of who was buying. Maybe it was just one set of investors with same risk appetite.
At a very basic level, oversubscription is supposed to reflect investors’ appetite for IPO by comparing the number of shares they want to the number of shares that are actually available.
This, in simple terms, defines the demand supply dynamics. The more the demand, supply held constant the faster the goods will disappear and if it’s an auction, the more the price will go.
Trustco was oversubscribed by almost the same amount - three times - with listing price of N$3.20 in 2006. Some people burnt their fingers while others made money but the price at the end of the trading day - 19 June - was a mere N$0.80 cents.
Internationally, Facebook Inc was five times oversubsribed by institutional investors. They bumped up both the numbers of shares sold and the price range, normally tell-tale signs that there are high indicators of interest.
But that interest didn’t hold up much past pricing with the stock ending its first day of trading essentially flat before falling sharply in subsequent days. It closed the week down 21% from its IPO price of US$38.
Most of institutional investors take a broad look at buyers’ so-called indications of interest ahead of pricing, which are preliminary orders that show how many shares each investor is asking for.
However, investors inflate their indications of interest, especially on hot deals anticipating to receive only a portion of what they request.
Bank Windhoek used a 10% pro rata allocation for foreign institutions and 35% pro rata allocation for Namibian retail.   
Some of the institutions, especially pension funds and investment company, will just mop up shares to meet statutory obligation which might change the day they get an opportunity somewhere.
And during volatile markets, when investor sentiment can swerve from upbeat to negative overnight, deals that appear oversubscribed on paper ahead of pricing can take a nose-dive once they begin trading in real life.  
Generally, when a stock is oversubscribed, you would expect to see it trade up at least for the first few days. People who ostensibly want more shares than allocated would be inclined to buy more in secondary market.
When there is no correlation between the oversubscription rate and price perfomance, it’s possible the deal was priced too high.
Most analysts’ sentiments are that the Bank Windhoek deal is a bit on the high. A correction will be automatic.
In special cases where you have a marquee deal, some people may just want to be part of the IPO. If they don’t get all the shares they want, they may not plan to do any more buying the next day and this causes the price to fall.  
When frenzy for a hot deal gets too hectic, it can be very difficult to price accurately for demand.
So the opinion is let’s not open the champaign bottles as yet . Yes the company got 3.5 times oversubscription, but what good is it for the investors.
It might be a bad thing, because you can’t possibly have that many people who really understand the operation of Bank Windhoek! Most are speculators and trust speculators at your own peril.  Anyone is going to be interested in hot deals that are supposed to pop. So for Bank Windhoek, the question is: Do you really want to give that discount to a buyer who is going to flip it the first day? If it 3.5 times oversubscribed that is what is likely to happen and the company will be owned by momentum traders.
What determines whether the company’s IPO is hot or not  is not whether the deal is oversubscribed or not but how oversubscribed it is.
Specifically, how many multiples of supply there is legitimate demand  for - and what price elasticity is for this demand. Quality of takers is also very crucial. Remember, at one stage Barclays and ABSA where interest in this institution, there might be the other ones taking shares.  So if these kind of investors are in the game, then we are in for a volatile share because we will need to make our money fast but if not definately the share will plummet and would not fit in a long term portfolio otherwise you end up sitting with clients money not generating anything.