MasterCard Surge
If you guys have been following Master card which IPO’ed last year, you would have noticed how the stock has jumped almost 250% in a matter of months. This leads me to the question as to the credibility of the people pricing these IPO’s. It’s just stunning that this IPO was priced so low ($39) especially knowing what a mammoth MA is. Now the entire sets of analysts are coming out one by one with an upgrade saying how mammoth MA is.
What were they thinking when an IPO price is set? Or is this a Wall Street ploy to reap huge profits that an individual investor like me cannot understand?
3 comments:
Contrary to common perception, most IPOs stall or fail after the first year. Some, however have spectacular early returns followed by steady growth, which are the ones we hear about, resulting in skewed perception.
Most of the time, the IPO process essentially involves taking a little known private company and introducing it to the public and asking it for money. In such cases, the public takes a leap of faith in the unknown company. As a result I do think banks guesstimate some aspects of the IPO prices (especially future growth), even though no bank will admit to it.
Some companies on the other hand are already very well known publicly before the IPO even though they are privately held. Google (IPO Auction), MC are such examples. In such cases banks still need to price these based on fundamentals (current price based on value X projected future growth). But thirsty investors drink up the stock to get a piece of the pie of a well known company that until then was off-limits to them, driving up the stock through the roof in the initial offering.
Banks can’t put a number on the “thirst” or demand factor.
(there are other games like issuing too few stocks etc. to influence price, which I won't go in to now..)
Over the long run, if the company surivives, the prices get reset based on valuation. But it is the initial "surge" that is of interest in the case of IPOs.
A lot has been discussed about the efficiency of the IPO pricing process and the "surge", which probably needs a lot of work. But again, this happens in only a minority of cases, so I don't think there is any groundswell of "investor protection" sentiment against this our there.
See here for some IPO basics –http://moneycentral.hoovers.com/global/msn/index.xhtml?pageid=1954
I do understand that we can’t put a number on the “thirst" or demand.
But what bothers me is all the upgrades and revised estimates that analyst come up with after the fact thereby giving hope to the investors.
Thanks SK for enlightening me again.
yes - what these "analysts" do is criminal.
do you recall the "chimpanzee" analysis of the late 90s? some TV network put a list of stocks in front of a chimpanzee and had him "pick" stocks by throwing a banana or something? the chimp beat most mutual funds..
i have always wanted a "stock analyst" job - where you can be wrong most of the time and still get paid tons of money. i bet most of us can't get away with that in our line of work..
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