4 July 2010

Beware of trial balloons in IPO valuations

All-too-often promoters of IPO's use a gullible financial press to spread valuations for their planned initial public offerings that have little bearing to reality. High levels are used to soften up the institutions and retail investors and 'anchor' their price expectations. Once these levels are widely disseminated in the media they become a self-fulfilling reality from which 'concessions' can be offered during the proper offering period. The media usually do little but report the headline number - without questioning how it is derived and whether it can be justified in the first place. While the ultimate investors behind the institutional shareholders have little influence over the actions of their 'fiduciaries', individual investors are well advised to monitor the participation of their fund managers very closely.