GLENCORE IPO
Objectives of the IPO
Increasing its market dominance in the mining sector was the main reason behind the IPO of the company. The price of 545 pence was strategically set to ensure that enough funds would be secured in order to achieve this fete. Therefore, the company managers believed that the IPO would adequately position the company for Growth. Another objective in this case also included the fact that the company’s partners would have the ability of selling their equity without any need of selling its assets to deplete the working capital. The Company also wanted to increase its liquid capital availability by up to previously indicated projections of $ 12 billion. The fact that Glencore had eyed a mergers prospect with Xstrata also acted a part in the IPO (Machellan & Marques, 2011). It is believed that Xstrata’s CEO had not only negated the allegations considering that he had not been formally approached, but also insisted on seeing the value of Glencore’s shares before accepting such a merger.
Timing for the IPO/Rationale for the issue
The timing of the IPO is perfect in this case. This is because of the fact that the company’s performance is well in the market. At this time, setting the share prices relatively low ensures constant and assured demand. The fact that investors are also more than willing to buy the shares also adds to the factor of timely and well planned structure regarding the IPO issue.
Cost
The company’s 22 underwriters regarding the IPO made a commission of 1.75 percent on shares sold. This amounted to about $ 170 million according to the company’s prospectus. The overallotment options arising amounted to $ 17 million. Thus, the total cost for the underwriters amounted to approximately $ 187 million. According to the company’s discretion, it was under the law to offer the bonus of $ 83 million split.
Stabilization
The lead underwriters for the company were Morgan Stanley, Citi, and Credit Suisse. Others listed in the prospectus were BNP Paribas, Banco, Santander, Barclays, UBS, among others. After pricing the shares at 530 pence each, the value fell to as low as 506 pence in conditional trading thus closing approximately 2% below the offer price on May 27. At the same time, the shares were trading at HK $ 67 in Hong Kong. This was not in line with the going up of Morgan Stanley, World Metals, and Mining index by 0.5%. However, it is true to imply that new stocks are often volatile.
Lock–Up Arrangement
Executive directors of the company entered into a lock-up consensus regarding their stock until an agreed projection of five years after the issue. As pointed out by the top managers, the partners in the company were aiming long-term investment as the mode of business conduction. As indicated by Glasenberg, the IPO would avail a very fair price in the projected merging with Xstrata Plc.
Share Price
The share price for this company’s IPO was fair as it has not gone very much above or below the initial offer during its trading at the stock exchange. However some investors felt that the share was a little bit overpriced based on the fact that the company’s governance is not as reassuring for good returns as the share price suggests.
Signaling
The Glencore IPO was considered to signal a crash in most commodity prices. This is based on the notion that the insiders in the company may be selling out at a time when they feel that the market has little prospects for prosperity in the future.
Investors
The buying of the Glencore shares in the IPO initially allowed only institutional investors during week one of trading. However after 24th May the same year, private investors were given the chance to also participate in this IPO. The institutional investors in this case include companies such as the Kuwait Investment Authority, Qatar Investment Authority, the Abu Dhabi Investment Authority, Zijing Ming Company, and the Singapore Government.
Discount
Glencore Company offered a discount of about 20 pc in its initial offer. The justification given for this was that there were fears on the way the company was run in terms of motivation and governance (Ebrahimi, 2011). The discount was hence given as an incentive for investors to buy the share and stop complaining of the risks involved. This cannot be termed as under pricing as the share price is within the acceptable discount range.
Future Expectations
It is expected that the Glencore Company share may rise once it gets into a merger with other international companies. It is important to point out that reports from the company show that its main aim of going for the IPO was to increase its equity base (Dana, 2011). However before this merger occurs, the share can be expected not to change a lot.
LINKEDIN IPO
Objectives of the IPO
Timings for the IPO/ Rationale for the issue
The timing for this IPO was good considering the fact that it came at a time when other social networking sites such as Facebook and Twitter are planning to go public too. It is simply logical to say that the Facebook IPO will be bigger than that of LinkedIn based on the former’s popularity. Hence the company would have risked having to beat high standards that would be set by Facebook and Twitter were it to set its IPO after these larger companies.
Cost
The LinkedIn IPO cost the company about 7% in IPO fees paid to the underwriter. This means that company projected to pay the underwriter about $ 28 million which in actual sense translated to about $ 200 million due to the under pricing (Salmon, 2011). The underwriters for this IPO were Bank of America, Merrill Lynch, Allen & Company, and Morgan Stanley.
Stabilization
The issuer granted the underwriter a 10% allocation of extra shares to stabilize the share price in the one month stabilization period. The book runner for this IPO was Morgan Stanley and was necessary to stabilize the prices.
Lock-Up Arrangement
The lock up arrangement for this particular IPO was six months. This means that company executives and underwriters who bought the shares could not sell them until a period of six months was over (Baldwin, 2011). The company did this to ensure that the share price had some stability within six months after the IPO.
Share Price
According to Blodget (2011), LinkedIn sold its share price at a lower price than it should have. This is because within the first day the price of the share had risen by about 90% which in a hypothetical situation would mean that the company’s value rose by this percentage within less than 24 hours- of which is not true in the real world (Espinasse, 2011). This means that the company’s share was undervalued by the underwriting company.
Signaling
The LinkedIn IPO signals that the world is entering a period of public social networks. This can be confirmed by the fact that Facebook has also indicated that it will also have an IPO soon.
Allocation of Shares
The LinkedIn IPO was also over subscribed and though the allocation was not limited to a particular group of investors, the amount of shares allocated to each investor had to be definitely reduced from the amount they had purchased. With $ 5000 it would still be hard to secure an allocation based on the high demand for these shares.
Under pricing
The case of LinkedIn looks like a perfect example of a company that was cheated out of what should have been theirs by a clever bank (Blodget, 2011). This is the reason why the share for the LinkedIn Company was at the top by nearly 100% while that of Glencore remained at the bottom. It is said that the LinkedIn share was under priced because it was sold to investors during the initial offer at a cheaper price than it traded in the stock exchange. This means that when LinkedIn’s share started selling it sold for its actual value and not the underpriced value and hence the share price was higher than that of Glencore.
Discount
The LinkedIn share gave a discount of about 50% which is way above the expected figures of 15-20% (Lipman, 2008). The reason for this is that the underwriting bank was not accurate or honest when it valued the company’s share price before the IPO. This means that the bank is the one that benefited most from this huge discount though other investors also benefited. $ 90 meant that the company lost all that money to the banks which benefitted from selling the share at a price higher than it had bought it from the company.
Future Expectations for the Share
The LinkedIn share may not go up as expected. This is because as much as it is highly valued many investors are aware that they don’t stand to gain as much now as those who bought the share before the IPO (Lever, 2011). Also it is most likely that some investors who made their purchase during the IPO will choose to sell their shares and hope to cash in on the huge discounts (Breitbarth, 2011). The most likely time for doing this is after the six month lock up period made by the company.
References
Lever, C. (2011). The Fortunes of Glencore. London: British Library
Breitbarth, W. (2011). The Power Formula for LinkedIn Success. New Jersey: Green Book
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Espinasse, P. (2011). IPO: A Global Guide. Hong Kong: Hong Kong University Press.
Lipman, F. (2008). International US IPO Planning: A Business Strategy Guide. New York:
Wiley
Machellan, K. & Marques, C. (2011). Glencore’s Record IPO makes Debut. Reuters. Retrieved
from http://www.reuters.com/article/2011/05/19/us-glencore-
idUSTRE74H3YC20110519
Dana, C. (2011). Glencore IPO moves to the Next Test. The Wall Street Journal. Retrieved from
http://online.wsj.com/article/SB10001424052748703509104576331363602040414.html
Blodget, H. (2011). Congratulations LinkedIn! You just got screwed out of $ 130 Million.
Business Insider. Retrieved from http://www.businessinsider.com/linked-in-ipo-2011-5-b
Salmon, F. (2011). The LinkedIn IPO Debate. Reuters. Retrieved from
http://blogs.reuters.com/felix-salmon/2011/05/23/the-linkedin-ipo-debate/
Ebrahimi, H. (2011). Glencore Secrecy threatens to slash IPO Price by 20 pc. Telegraph.
Retrieved from http://www.telegraph.co.uk/finance/markets/8467529/Glencore-secrecy-
threatens-to-slash-IPO-price-by-20pc.html
Baldwin, C. (2011). LinkedIn Share Price more than doubles in NYSE Debut. Reuters. Retrieved
from http://www.reuters.com/article/2011/05/19/us-linkedin-ipo-risks-
idUSTRE74H0TL20110519
