IPO lessons unlearned in the UAE

One of the most predictable developments is that once a secondary market has established a strong and sustained positive momentum, in what may be called a bull-market, strong activity in the primary markets (IPOs, private placements, rights issues, etc.) is almost certain to follow.

Walid Shihabi, Head of Research in Shuaa Capital says that what is also predictable is that as the market reaches an advanced stage of primary market activity the quality of the public offerings may begin to decline, as opportunists rush to take advantage of heightened investor interest.

This cycle was well represented in the UAE market during the years 1997 and 1998, in which the equity markets witnessed a sharp rise followed by an equally sharp decline. Mr. Shihabi also mentions that the IPO market in the UAE had sprung back to life in the mid 90s after decades of absence, with the IPO of Dubai Investments.

This successful offering was followed up with highly oversubscribed offerings by Abu Dhabi Islamic Bank, Emaar Properties and Oasis International Leasing in 1997, and Tabreed, Manasek, Asmak and Etarat in 1998. This flurry of activity saw demand on the shares rocket post-IPO, taking them to multiples of their initial offering price.

What investors had overlooked though was that all companies that were offered during that period were in fact not companies at all, but unproven projects on paper, and in some cases, raw assets and licenses to operate.

For successful ventures would need a number of years to be converted into full-fledged public companies, and generate the required rates of returns for investors, while the unsuccessful ventures would ultimately destroy shareholder value.

Investors learned the hard way, as many offerings eventually collapsed in price and capitulated, or continued to limp to this day below their offering price, after eroding shareholder funds.

Other companies failed to generate the rates of return required by investors, mostly burdened by over-capitalization due to the fact that they had raised way too much money at the time of IPO. A few companies managed to shine, blessed with a good business plan, but also immense government support, grants and other perks that helped boost value and performance.

Beware the hollow IPO

Mr. Waleed Shihabi says that Investors appear to have short memory spans, as we find ourselves today facing a flurry of upcoming IPOs, many of which, if this time not all, are unproven projects trying to raise obscene amounts of capital, while the public happily complies, expecting to generate multiples of the offering price in a short time span.

The objective assessment of many of these IPOs and their prospects of long-term success is a matter of pure guesswork, suitable only for highly adventurous capital.

Investors may soon rediscover that investing in public offerings requires much more scrutiny, and at a bare minimum the existence of an underlying company that has a history of operation, a proven management team, and a clear value prospect for the capital being raised or being sold, a qualified investment bank to value and lead the issue, and ultimately, the scrutiny of the securities authority to ensure the adherence to the above conditions transparently by the issuing entity.

Otherwise, the exercise of capital raising is reduced to the equivalent of participation in a pyramid scheme.