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Dubai: The overexuberance of investors connected with initial public offerings (IPOs) in the Gulf stock markets of 2005 certainly dimmed in the correcting market of 2006, but still the combined value of over $7.5 billion represented a 35 per cent increase over 2005's total of $5.6 billion.
Of the 23 IPOs, the top nine deals raised a total value of $5.2 billion, according to figures provided by Zawya IPO Monitor. The average IPO size grew 24 per cent to $326.6 million in 2006 from $264.4 million in 2005.
2005 saw greenfield companies or start-ups, without a proper track record and even proper business plans, issue IPOs.
But then, some observers argue that in a bull market, when speculation is rife, it is not uncommon to have that sort of an overreaction to the positive trend - to some extent reminiscent of the US market during the internet bubble of the 1990s.
The oversubscription per IPO decreased by 39 per cent to 48 times in 2006 from 79 times in 2005 - still remarkable levels.
That does not surprise Christian Mouchbahani, chief executive officer of Jefferies International, Middle East and North Africa. "When you have larger IPOs, the amount of oversubscription comes down."
However, oversubscription is not always a sign of a successful IPO, says one analyst. "For example, there were many companies in Saudi Arabia that were oversubscribed, but what happened after that?" asks Shadi Zubaidi, director, global investment banking advisory, HSBC-Saudi Arabia.
Selling shares
Zubaidi explains: "Suppose that eight or nine million people subscribe to an IPO. What does that mean? That means on the first day of trading there will be around seven or eight million who will be selling their shares in the market and therefore the price will not appreciate as much as everybody has hoped on the first day of trading, at least in a declining market."
In fact, two Saudi IPOs, that of Saudi International Petrochemical Company and Fawaz Al Hokeir and Company, opened below their offer price, reversing a long trend of first-day spikes.
Analysts tend to agree that the correction which the market underwent in 2006 augurs well for the future IPO market.
"If you look at the names last year, there were selective IPOs, fewer start-ups and more established companies that floated," says Mouchbahani. "Going forward, there will be IPOs coming on, but it will be more selective [again] - larger companies and also better-quality companies."
The appetite for IPOs is still there, despite dented investors' confidence, say experts.
"Good companies, good sectors, good management will always go public," says Albert Momdjian, managing director and head of Middle East and Africa, investment banking, Calyon Bank.
Confidence
"You need to bring back investors' confidence, and the only way to do that is to show that we are offering large solid companies that speculators cannot manipulate or play around with," Zubaidi says.
As the markets in the region mature and evolve, observers believe the need for more IPOs for the markets will continue growing.
But even before this uptrend of IPOs reemerges, they feel that laws and regulations have to be put in place to encourage quality rather than quantity.
"For example, look at the way the prices of IPOs get done," says Momdjian. "You have the Ministry of Commerce [in Saudi Arabia] who have nothing to do with IPOs, nothing to do with the capital markets, having to approve the valuation. Once they approve it, they have to go to the Capital Markets Authority (CMA) and once the CMA approves, it goes to the market with a fixed price. That is unheard of anywhere else."
Zubaidi has a better feeling about other government influence in the market.
"There has been a lot of pressure on these governments to intervene and save the market and buy back some of the shares from the local market - and governments have [rightly] resisted that," he says.
Better rules and regulations for the markets as a whole would be a useful development, many say, because it would facilitate the participation of institutional investors.
Having more institutional investors means a more sophisticated, less volatile base of investors.
"You also need international investment banks to commit to the region and develop research and sales capabilities like brokerage operations," Momdjian says. "We need to have independent research and distribute the research to the investors. We also need to develop the mutual funds industry, and also need to work on accessing several markets in the Middle East."
In a changing market, clearly, there is a need for the way lead managers function to change, analysts point out.
"They need moving from the role of a mere cash collector to an advisor to a syndicate manager - a manager of market dynamics," Mouchbahani of Jefferies says.
Also, Calyon Bank's Momdjian says they need to think more ethically and they need to be governed better.
"Look at the quality of prospectuses they offer. Look at the way the companies put their projections and business plans. How on earth they can do that? In international markets you don't see that," he adds.
Even if the prospects for stock market performance are improving because of the evolution of IPOs, there is still much to do, it seems, to give the market structural underpinning.
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