Recent IPOs – What They Mean For The Market
I learned an important lesson my first day as an investment banker… The only thing that matters is the money. The fees in investment banking are huge. There’s no limit to how far bankers will go.
That’s what prompted one of the strangest trips of my life.
It was a few years ago, but I still remember the sunny Friday afternoon in San Francisco. I could see the small town of Tiburon across the bay from my window. I was sitting at my desk on the 39th floor of the Embarcadero Center.
I just started at the firm a few months earlier. And I was eager to prove myself.
I heard the head of the west coast office sauntering over to the analyst pit. He asked in his most detached voice, what we were doing for the weekend. By now I knew better… He didn’t care about our weekend… He was looking for a junior banker to do his bidding.
I offered up that I was free. He asked if I had a passport then told me to follow him.
As we walked back to his corner office, he started telling me about a new financing for a client in Taiwan. The company’s in the semi-conductor industry and they needed to raise $300 million… Fast!
A few hours later I was on a flight to Taiwan.
Sitting in first class (row 1 seat 2), I started reviewing the diligence process I’d need to go through. Luckily we’d recently worked on another deal for this client. The workload wouldn’t be too bad.
The flight time was 12 hours to Taiwan.
It was raining cats and dogs when we touched down. The car picked me up and drove me another hour and a half to the hotel. It was the middle of the night when I checked in. My wake-up call was set for four hours later.
I had a 7 am breakfast meeting with management, followed by eight hours of diligence on the company.
Then my driver picked me up from the company office and drove me right back to the airport. When it was all said and done, I’d spent just 20 hours on the ground in Taiwan and 24 hours flying there and back.
If I remember correctly, our fee was just over $1 million… Not bad for 44 hours of work.
With money like that on the line, you learn to watch the markets closely.
Raising money for a company isn’t easy. You can spend months, or years, grooming a company for a fundraising. If you bring the company to the market at the wrong time, the deal struggles. Or worse, the deal doesn’t get done.
I learned quickly it’s all about timing.
Do a deal when investors are hungry and you get premium valuations and transactions close quickly. The loss of a single day can cost the company hundreds of millions… and the bankers could lose their seven figure paychecks.
When a client decides to raise money, bankers move at sprinters’ speed.
The only measure of the IPO market is how other companies’ offerings are performing. That’s why fundraisings happen in groups. Often a particular industry or type of company will get hot. Investors clamor for shares… and the investment bankers search high and low for companies to feed the demand.
Just look at some recent IPOs from the last few months.
Changyou.com (CYOU) is up more than 100% since their IPO in April.
Recon Technology (RCON) is up over 81% since their IPO in July.
Duoyuan Global Water (DGW) is up more than 50% since their IPO in June.
What’s this mean?
Institutional investors are making money off of IPOs. That means they’re likely to demand more product. With the IPO window open, it tells me companies, investment bankers, traders, and most importantly, institutional investors all see good things ahead for the market.
It also tells me the recent market rally isn’t a head fake or a “Bear Market Rally”. I believe we’re at the beginning of the next leg higher. In early August, I called for Dow 10,000. Now I’m virtually certain we’ll get there sooner rather than later.
I have a few great ideas on how to profit from the booming IPO market… Unfortunately I’m out of room for today. Watch closely, I’ll be writing about my ideas in future issues.
Category: Stocks
