New research sheds light on pulled IPOs

The failure of Digicel Group to launch its initial public offering (IPO) has raised questions about the reasons why Denis O’Brien decided not to go ahead.

At one level the issue is perhaps not that hard to fathom — a telecoms company focused primarily on emerging markets is going to be a tough sell when global economic conditions are deteriorating.

But what do we know about what happens to companies that have either pulled IPOs in advance or have failed to raise the funding that they expected?

Academic research on causes of IPO failure or IPO being pulled is not that extensive. That said we do have some evidence on numbers and causes of IPO failures.

Early research focused on the US in the 1980s and 1990s and found that approximately 85% of companies succeeded in getting their IPOs away.

But, of course, that means 15% of the companies did not get the IPOs away and were forced for one reason or another to withdraw their plans.

According to the research, those companies were most likely to be involved in primary industries such as mining and construction, rather than in services such as telecoms. A number of characteristics are strongly associated with the decision to withdraw.

Most prominently, companies that have high levels of debt, which were issuing shares to pay down debt, and businesses where the original owner would retain a significant shareholding, were among the companies that would most likely withdraw from the process.

Some of theses factors may have been in play in the case of Digicel. More recent work has looked again at these factors, and also examined what we can refer to to as the ‘the afterlife’ of pulled IPOs. The research confirms earlier findings on the characteristics of pulled IPOs.

It also found that only 10% of companies that pulled IPOs in the 1980s and 1990s returned to the market, ever. Of the successful returnees, the mean time to reissue shares was in excess of two years.

Those that did return are strongly associated with general market conditions — returnees usually take advantage of a ‘hot market’, when there are lots of other IPOs.

The one element that really seems to differ is the interest rate — falling interest rates are also strongly associated with returning companies. Those that do successfully return also tend to switch underwriters for more highly ranked investment banks.

In the case of Digicel, it already has on its roster leading international advisers JPMorgan and Deutsche.

Those that do switch advisers are able to raise significantly more capital than those that do not. Particularly in weakening capital market conditions, there is a strong relationship between the ownership by the chief executive and withdrawal from the IPO process.

Finally, all things being equal, returnees gain lower first-day returns than do those that succeeded in the first place in getting the IPO away. Further research suggests that there is indeed a significant negative valuation signal from an IPO withdrawal, as companies which pull their plans and which are subsequently taken over, gain less than under most acquisition deals.

Indeed, there is strong evidence that companies that withdraw are at significantly greater risk of bankruptcy than those that do not. What of more recent times?

Some work which I am undertaking with a research student focuses on the nature, determinants and extent of IPO withdrawals and resurrection since 2000. Looking at the US, we found that the extent of withdrawn IPOs is a little higher, perhaps as much as 20%, than was the case in the 1980s and 1990s. The figure for Europe is lower, in the high teens.

So, the probability of an IPO not going the full distance is reasonably high. This may in part explain the well known phenomena of high first-day returns on IPOs — it is a part payoff for risk that the IPO might have been pulled at any stage.

The research may suggest that Digicel will not be relaunching its IPO plans in the near future. That is not to say that it cannot, but it may be unusual if it did.

Brian Lucey


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