IPO Road Shows Should Be Open To All
from the we-have-the-technology... dept
There are many problems with the current IPO process, which is often designed more to enrich certain bankers and their friends, rather than to actually raise the most money possible for the company going public. With the recent focus on Wall Street practices, it seems like people are beginning to realize this but aren’t sure how to solve the problem. One very good suggestions is that internet road shows should be open to all. If you’re unfamiliar with them, the road show is the process by which the company’s management tries to convince certain large investors that their company’s stock is worth buying into. These are the large investors that the underwriters will then sell the stock to at the start of the IPO. Of course, during these road show meetings, the management reveals all sorts of info about the company and their projections that no one else gets to see. This isn’t exactly fair for the average investor who also wants to buy into the company. Thanks to this wonderful invention called the web, it’s certainly possible to make sure that any road show meeting is also webcast. Even better, this suggestion says that any important info revealed in a non-webcast meeting should be required to be revealed publicly as well – to make sure that everyone is on the same page. This is such a reasonable suggestion, it’s unlikely to ever happen.
Comments on “IPO Road Shows Should Be Open To All”
Hall of Mirrors
That will never happen, and here’s why.
There’s a secondary effect going on in these road shows. Much of the information which is not publically released includes things which are purely speculative, things said with the wink and the nod and the ‘approximately’ and ‘optimistically’ and so on. If any of this was committed to paper, it would leave large targets on the wall which the company would then be expected to meet, leaving the operators open to lawsuits if they didn’t meet those targets. The SEC rules for what is disclosed are very strict, and very limiting — this way the primary investors (who, let’s face it, have the largest stake in all this) get the wink-and-a-nod presentations that let them judge the potential investment much better.
One of the books I read over the last few years referred to this as the ‘hall of mirrors’ effect.(I think it was ‘Nudist on the Late Shift’, but I’m not sure).
IPO Road shows
The SEC’s rules are set up to try an protect the average citizen from unwise investments. While some investors make tremendous gains on IPOs, a lot of these companies end up tanking and the investors lose everything. The general public does not have access to these deals in general because the general public would get hurt (i.e. blow their life savings on a silly investment a la Boiler Room.)
Additionally, from the entrepreneur’s point of view, the company is still private and as such has no obligation to the general public to share information. In many cases this could be detrimental to the success of the private company, and its success in the public market.
Once the company is public, the general investor has rights to specific information about the company. However, while the company is en route to becoming public, it is still private, and as such has the right to protect its information.
Re: IPO Road shows
The general public does not have access to these deals in general because the general public would get hurt
This is a huge myth. You’re basically saying that the investing public is stupid and wouldn’t know what to do if they were given the information they should have. While the investing public may act like sheep all-too-often, it’s a bit elitist to assume that they “can’t handle” information. In the sake of “boiler room” cases, that’s where misleading information is being used. If information is public, than people can more accurately point out the misleading information.
Additionally, from the entrepreneur’s point of view, the company is still private and as such has no obligation to the general public to share information.
This isn’t true. If they’ve filed to go public, then those rules no longer apply. They are required to publicly disclose certain pieces of information, while keeping quiet on other pieces of information. The question is why one class of people are allowed to get certain information while others aren’t.
However, while the company is en route to becoming public, it is still private, and as such has the right to protect its information.
Sure, they have the right to protect certain information, but why should they only give it to one class of investors?
The information in road shows
Based on what I’ve heard from fund managers (institutional investors) and analysts, the “information” that investors get from road shows is soft, not hard. A big part of what the professional investors learn at the road show is how competent the management is. Do they have a strategy? Is the strategy reasonable? How is it likely to do, relative to competitors? A problem that fund managers and analysts constantly face is trying to figure out which managers’ forecasts to believe. If you talk to the 5 largest companies out of, say, 20 in the industry, each of the 5 largest companies may tell you that they expect to have a 25% market share next year. Adding this up leaves a -25% market share for the rest of the industry – obviously, they’re not all going to meet their target, but which one is likely to get closest? It’s this type of analysis and forecasting that they deal with every day, and it’s an important part of evaluating an IPO. The managers don’t give secret information to certain investors at the road show – they stand there answering questions while the investors decide whether they know what they’re doing.
That said, the road shows should certainly be on the internet. There was a German investment bank called Net.IPO that had online road shows for IPOs across Europe, with any and all investors allowed to not just listen but e-mail in questions.
That same investment bank took orders from retail investors for IPOs, giving everyone an equal chance (but not allowing them to mess up the price setting process, as in a “Dutch” auction). There were several investment banks doing this in Europe before the IPO market dried up but what was special about Net.IPO was the way they decided who could place an order. Any investor that wanted to participate in an IPO had to pass a short, multiple choice exam about the issuer, based on the prospectus. This encouraged investors to read the prospectus and think about the risk factors, use of proceeds, etc., rather than just trying to buy into every IPO and then flip out the first day. This is what Google should do – open up the process to everyone, but favor those that know or are willing to learn about the company.