IPOs are back in action in Europe, with several deals announced or launched every week. But many IPOs have slipped after launch, there have been some blow-up block trades and convertible bond issuance is down. Harry Wilson weighs up the good and bad omens.
On March 11 the resurgent European IPO market received its first big test - a major terrorist attack on a European country.
"We were in the middle of the Belgacom deal when the Madrid bomb happened, so were in a postion to directly see the effect of the bomb on the bookbuild, and the way investors view risk," says Adam Gishen, an equity syndicate banker at Lehman Brothers in London. "It definitely slowed people's decision-making process. Whilst Belgacom was a huge success, it was apparent that people stopped and looked at the overall market."
The success of Belgacom was thrown into relief by the simultaneous failure of IPOs for German semiconductor manufacturers X-Fab and Wacker Siltronic.
Though bankers are keen to point out that these companies had specific problems and that investors have a general lack of enthusiasm for the semiconductor industry, the deals confirmed an important trend for 2004 IPOs - investors' selectivity.
"The market has become disciplined to saying no to the transactions which do not meet its requirements," says Philip Lynch, head of European and Asian ECM at Lehman Brothers in London. "It is preferable that the market rejects, and transactions are pulled where circumstances are not correct, than not having this signal and a transaction getting done and subsequently trading poorly in the aftermath."
Some market participants believe banks and issuers are learning this lesson, unpalatable though it may be.
"With every trade that gets done, people are becoming more sensible," says Michael Lavelle, head of European ECM at Citigroup in London. "The market is definitely open for high quality companies, and as long as people proceed cautiously we are going to see a good flow of deals. Issue volumes are likely to remain the same in the second quarter as the first, we'll probably get close to $40bn [for the quarter]."
One trend that might spoil the party is the fact that most IPOs launched this year are now trading below their offer prices.
French telecom and internet company Iliad, which opened the year's IPO market in January, has lost 14.8% since its Eu104m flotation, which was 20 times oversubscribed.
Though part of this sell-off is explained by market volatility since the Madrid attacks, the feeling is growing that floated companies have been valued too highly.
Blocks in the road
While banks may be showing restraint in the IPO market, no such reserve is apparent in the field of bought deals.
Banks are bidding as aggressively as ever for deals, apparently with their eyes on the league table credit, and frequently with disastrous results.
Citigroup's January block trade of a 20.8% stake in German semiconductor manufacturer Infineon for Siemens still stands as the most obvious failed trade of the first quarter.
The Eu1.76bn deal left the bank an estimated Eu100m poorer, though Citigroup insisted its loss was far lower than this.
"It is almost inevitable that the highest bid is the wrong bid," says one head of ECM in London. "You get five people bidding, and you get four people saying you're bidding too high, the chances are you're bidding too high."
In March, Deutsche Bank's Skr14.9bn ($1.97bn) block trade in Swedish truck maker Scania ended disastrously, with the bank facing an undetermined loss as well as being left with some of the stock on its book.
More recently Goldman Sachs' $1.2bn trade in Telenor, the Norwegian telephone company, ended with the bank holding a portion of the company's shares and an undisclosed loss.
"The problem with large blocks is that, if you don't get the pricing right from the start, then momentum is lost and you have the whole market against you," says Gishen at Lehman. "If you are selling the shares into a fixed price and the stock falls through the price, you will have great difficulty finding buyers. These blocks have to be priced correctly, otherwise you don't stand a chance."
This fierce competition has, of course, enabled issuers to sell large shareholdings at extremely tight discounts to the market price.
But the benefits for investment banks are more tenuous. Successful deals win league table credit and any financial reward, but sales which go badly can anger investors and make them wary about buying stock from the bank another time.
Rights fly, converts die
The picture is much brighter than a year ago for mainstream equity issuance, but almost inevitably, the equity-linked market has not maintained the high volumes of last year.
"The convertible market will come back," says Lynch at Lehman Brothers. "The reason we haven't seen so much issuance is people have been more willing to do straight equity because of where valuations are. Also, there was a lot of issuance last year, so some business got front-ended into last year's market and that leaves a gap."
One of the first quarter's less obtrusive trends was the continued use of rights issues, particularly by financial institutions, with big deals from Banco Sabadell, HVB and Carlsberg.
"Acquisition financing will mean more rights issues in quarter two," says Viswas Raghavan, European head of equity capital markets at JP Morgan in London.
While many of last year's big rights offerings were designed to rescue companies from imminent capital shortages, the deals this year have been more about enhancing already secure finances and expanding businesses.
Corporate confidence and stock market valuations have improved a long way, but equity bankers are still worried that the recovery in the primary market could quickly disappear.
"Market stability is a concern - elections, interest rate movements or another terrorist attack could all upset the market," says Raghavan.
Lynch's view is that 2003 was a very good year for equities, which got the market to the starting line. "2004 has been slightly more volatile than we had anticipated," he adds. "But we are still very confident, and are forecasting a 15% rise in equity valuations between now and the end of the year."