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  • NOVEMBER 12, 2008

IPOs: Imaginary Profits Only?

The year 2007 could have been considered as the year of the initial public offerings (IPOs). Majority of the companies' IPOs were oversubscribed numerous times. And this too, in spite of these (IPOs) being fairly overvalued. However, since the beginning of this year, things have changed drastically.

The market sentiment has shifted to the opposite extreme. From buoyancy, the sentiment is now gloomy - both for companies intending to raise fresh money and investors who have burnt their hands in the IPO menace.

As per statistics from Centre for Monitoring Indian Economy (CMIE), the total amount of money raised in the domestic primary market (including public and rights issue and private placement) in the first six months of this fiscal has been Rs 389 bn. This is 60% lesser than the amount of funds raised during the first half FY08.

This is not the case in India alone. It is estimated that a total of 30 large sized IPOs the world over (valued at US$ 13.1 bn) were pulled out during October 2008. Incidentally, it is the highest volume of withdrawn offerings in a single month since 1995. As investors are fleeing to what is perceived as the safest asset to hold in these times i.e., cash, the IPO market has almost completely dried up.

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    The world has seen several cycles in the IPO market in the past, the last down cycle being the one post the dot-com crash. After this bubble burst in 2000, only 88 IPOs were issued worldwide in 2001 - the lowest annual total since 1979.

    As Benjamin Graham writes in his -The Intelligent Investor', "In every case, investors have burned themselves on IPOs, have stayed away for at least two years, but have always returned for another scalding. For as long as stock markets have existed, investors have gone through this manic-depressive cycle."

    Graham further writes, "In America's first great IPO boom back in 1825, a man was said to have been squeezed to death in the stampede of speculators trying to buy shares in the new Bank of Southwark. The wealthiest buyers hired thugs to punch their way to the front of the line. Sure enough, by 1829, stocks had lost roughly 25% of their value."

    Weighing the evidences objectively, intelligent investors should conclude that IPO does not stand only for -initial public offering'. More accurately, it is also a shorthand for - It's Probably Overpriced, or Imaginary Profits Only, or even Insiders' Private Opportunity. What do you say?

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