The fundamental truth of value investing hitting the IPO market
With IPOs, sellers may hold sway over buyers but even they must yield to a fundamental value investing truth – the biggest driver of whether or not you make money as an investor is the price you pay for an asset
Here on The Value Perspective, we have always been very wary of participating in stockmarket floatations or, as they tend to be known these days, initial public offerings (IPOs). This is because, as you may have seen recently when we republished our November 2011 piece Fear of the new, those considering investing in an IPO tend to start from a position of weakness rather than strength.
For one thing, anyone selling a business will know far better than any buyer what it is really worth. Also, with everyone involved in the IPO incentivised to make it happen, buyers are unlikely to receive a balanced picture of the company. Most importantly, IPO investors have – at best – just a few years of history on which to base their decision, which again makes it very hard to appraise the pros and cons of what is on offer.
Over the course of this summer, there have been a number of IPO-related episodes that have only served to underline these concerns. Take, for example, the saga of Univision Communications – the dominant Spanish language broadcaster in the US – whose owners, including a number of private equity firms, have been struggling for a while now to get an IPO off the ground at a time and a price that suits them.
The $13.7bn [£10.6bn] purchase of Univision in 2007 was one of the biggest deals during the leveraged-buyout boom that preceded the financial crisis. As the Wall Street Journal observed in an article in July, the deal “saddled the company with billions in debt” and while that burden “has eased somewhat in recent years, it is still a point of contention when it comes to determining a valuation for the company”.
“Private equity firms often seek to sell out after three to five years but are usually loath to sell for much less than what they paid,” the article continued. “Univision’s backers have been aiming to launch an IPO since registering with regulators in 2015 but have repeatedly postponed it because of weak performance among media-company stocks and a generally rocky IPO market.”
In Fear of the new, we highlighted how the business’s owners get to choose a date for their IPO that is most in their own interests, noting: “Since any sale is likely to take place at the time a seller considers most advantageous to them therefore, a decision to buy at that point is quite a statement.” The fact Univision’s owners have been unable to pin down a convenient date is quite a statement in itself.
Indeed, the striking difference between now and our article from 2011 is the extent to which the private equity investors who usually tee up the IPOs really are not having it their own way. This is highlighted by a second Wall Street Journal piece, which last month noted the floatations of Snap and Blue Apron Holdings “were supposed to herald a return of the great technology IPO”.
“They have instead become vehicles of market dismay,” the article went on. “Both companies now trade well below their initial public offering prices. More disturbingly for venture-capital investors, those prices are below what some paid for their pre-IPO stake. The result is renewed doubt about valuations across Silicon Valley’s private companies, whose worth has been climbing for a decade.”
Later on, the piece observes: “Analysts and underwriters say the weak performance of Snap, the largest IPO in two years, is stoking doubts among late-stage private investors. Such doubts could interrupt the cycle of ever-increasing funding rounds that has underpinned the lofty valuations of many tech start-ups.” In the world of the IPO, sellers may hold sway over buyers but, in the end, even they must yield to a fundamental value investing truth – the biggest driver of whether or not you make money as an investor is the price you pay for an asset.
Juan Torres Rodriguez
Research Analyst, Equity Value
I joined Schroders in January 2017 as a member of the Global Value Investment team. Prior to joining Schroders I worked for the Global Emerging Markets value and income funds at Pictet Asset Management with responsibility over different sectors, among those Consumer, Telecoms and Utilities. Before joining Pictet I was a member of the Customs Solution Group at HOLT Credit Suisse.
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