risky business?

Overcooking the IPO Issue

Stock Exchange Trading Floor. Börse Trading Floor, handelsplatz
Me, me, me.
  • Why it matters

    Why it matters

    The IPOs of Zalando and Rocket Internet were a bust, but it would be unfortunate to use these two examples as a reason to bar all young companies from the stock exchange, the writer argues.

  • Facts

    Facts

    • Chinese tech giant Alibaba floated on the New York Stock Exchange on September 19 2015
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    • Zalando floated on the Frankfurt Stock Exchange on October 1 2015.
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    • Rocket Internet floated in Frankfurt on October 2 2015
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  • Audio

    Audio

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They still exist, those courageous companies ready to risk an IPO even though market conditions are less than peachy. Commercial real-estate company TLG, for example, is going forward with its initial public offering despite the market’s falling stock prices and high volatility and uncertainty.

For TLG, the danger is considerable and its owner, U.S. investment firm Lone Star, is prepared to make price concessions if need be. In any case, TLG is profitable and in a much different situation than Berlin online fashion retailer Zalando and start-up company Rocket Internet.

 Zalando and Rocket were punished by the market following their IPOS. Their respective share prices fell as low as about 20 percent at times. Criticism surged. There was talk of a blow to the stock exchange culture, and investor protection organizations spoke of shattered confidence and investors being ripped off to the tune of several hundred million euros.

It would be silly, negligent even, to use short-term bad experiences as a reason to exclude all young companies from the stock exchange.

It brought back unwelcome memories of the “New Market” – a stock trading market for startups introduced in 2000 and closed in 2003 when the dotcom bubble burst – and its controversial growth stock listings, since removed from the exchange. The criticisms have sparked a demand to bring to the stock exchange only those companies that report sustainable profits.

These are harsh words and false conclusions. 

The euphoria surrounding the mega IPO of the China-based Alibaba e-commerce giant was certainly exploited by the three Samwer brothers and their associates in Rocket Internet and Zalando’s overpriced offerings. The banks did nothing to stop them and investors didn’t notice until it was too late.

But the correct conclusions have to be drawn from this. Investors learned their lesson after the Internet bubble burst. They hardly bought shares and were only allocated small numbers.  It was clear to all those involved that the Zalando and the Rocket Internet share issues had mostly symbolic value as hopes for the future.  Professional investors, like funds, based their investments on the confidence that these companies would strongly develop in the next few years. It is a good sign that the existing shareholders did not cash in their post-IPO profits. The money is being reinvested in expansion.

It would be silly, negligent even, to use short-term bad experiences as a reason to exclude all young companies from the stock exchange. Start-ups need money for growth. They aren’t as stable as say an established company like Siemens, but yet they are the future of Germany even if it’s not apparent at first glance.

Without innovation, audacity and financing, young companies don’t stand a chance. It begins with start-ups’ needs for venture capital. And it culminates in IPOs. Of course, potential investors face difficult challenges in all this. They have to balance opportunity and risk and figure out which companies are worth it. But without risk, there no reward is possible.

 

To contact the author: landgraf@handelsblatt.com

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