Suddenly, the tide has turned against IPOs (Initial Public Offerings). From excited and exulted news about the issues, and how their oversubscriptions reached dizzying heights, which were followed by massive listing gains, the headlines are sober, even depressing. We find events about low subscriptions, as one of the recent IPO was subscribed less than two times. Listing gains have vanished, with premiums in single digits. Many past IPOs that managed great listing gains are being quoted at huge discounts, including prices that are way lower than the offer prices. Now comes another suggestion of a panic-induced future. A new headline screamed that the past five booms in IPOs were followed by stock market busts. Ergo, be prepared for the great global correction in the future.
Remember 1987, just to give an example from a not-so-distant period. While the US was awash with mergers, and acquisitions, most of which were leveraged buyouts by managements and hostile predators, India saw a spate of public issues, and rights issues. There was mania among investors to get new shares, whatever may be the company, and whatever may be the valuation. Indian firms changed names, and launched new issues, and investors gobbled them up. Companies raised money through rights issues for no rhyme or reason. Stock manipulations were the key during the rights issues, as promoters surrendered their rights in favour of new and other investors at huge premiums. Grey market ruled as new issues were desired for the potential listing gains, as is the case now.
Within no time, the market crashed in 1987. Leveraged buyouts were washed out, and the rights issues went horribly wrong. During the early 1990s, India witnessed a demonic situation of vanishing promoters. Most of them raised money during the late 1980s, and siphoned it off. After a few years, their offices were empty, watched by a lone guard, there were no plants or factories, and the promoters were nowhere to be found. Investigations ensued, some of the founders were traced, and there were indictments, or convictions. A similar thing happened with the tech and IT firms in India in 2000 during the Ketan Parekh scam, as also in the US, when valuations, IPOs, and public issues ruled. This too was followed by the dotcom con.
One can possibly establish the links between the IPOs and market crashes. Public issues invariably lag stock price rises. As the indices go up, as do specific stocks, only the brave and risk-takers enter the fray. As they make money, and stocks continue to go up, others join in. This is around the time when promoters decide that this is the best time to raise money, given the high valuations. The IPO frenzy starts, backed by ever-higher indices, which leads to a herd mentality among investors, who cannot afford the already-listed stocks because of the high prices, and join the IPO gangs and queues. The IPO madness is in full flow, as the indices jump further. Obviously, a bubble forms, expands, and reaches its stretched shape.
It is time for the crash. Although the indices may move up on an average over the next few years, the herd mentality, and madness of the crowd forces an immediate shock. Too much money chasing too few stocks. Prices out of sync with profits. Valuations stretched, and waiting for a pinprick. It is now a matter of a whiff of bad news. Until now, for months, even years, bad news was discarded, and dumped, and a faint smell of good news was highlighted and celebrated with higher price movements. The opposite happens at the height of the bubble. The moment something seemingly-bad happens, the bottom gives way, floor crashes, and the ceiling dashes into the investors’ heads. Only a few escape. The majority is pinned to the ground, buried under the debris of dead hopes, dreams, and desires.
Do not think for a moment that this is unexpected. A few critical voices warn of the impending doom. No one wants to hear them. Although publicly, the experts goad investors, and scream that everything is fine, they are scared. So are the investors, but do not back away because of the FOMO factor. No one wants to miss out on the fun unless and until they are scarred. The promoters want their IPOs before the crash. Investors want to get in, and get out to benefit from the listing gains. Merchant bankers, investment bankers, and institutional bankers want to have stakes in the next Google, or Microsoft. Policy-makers do not want to rock the status quo. Economists are oblivious to the crazed environment.
This writer saw this bizarre phenomenon from close quarters in the late 1999, and early 2000 during the dotcom boom in the US. The valuations were as weird as they are now. IPOs were dime-a-day, as start-ups, and their founders dreamt of racking up valuations of billions of dollars, and becoming billionaires. The discussions at the social gathering, including the New Year’s party, was about the hundreds of millions that one made, or will make, and the real estate purchased at ridiculous prices. Yet, every angel investor, venture capitalist, private equity player, founder, and pundit I met spoke about the crash. For the dozens of people interviewed, it was not a matter of if, but when. It will happen, they said, but they did not know when, so they went ahead with what they did.
An introduction to one of the post-2008 editions of ‘The Great Crash,’ a seminal book of John Kenneth Galbraith, explains, “But there is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with its market effect is the order of the day. Prices go up even more. Then, for reasons that will be endlessly debated, comes the end. The descent is always more sudden than the increase; a balloon that has been punctured does not deflate in an orderly way.”
The initial air of the balloon is filled with facts, data, and realistic assumptions. Later, hot air creeps in, as desires, hopes, and optimism engulfs the investors. This turns into smoke, smog, and fog as the herd gathers pace, and runs blindly towards the edge of the mountain, ready to fall off the cliff. At the stages of the hot air, and the great run one witnesses the hundreds of IPOs, with the founders aiming to be the next dollar-billionaires. Everything is crazy, and hazy, and those who can intervene seem to be in a daze.
