Delivering a new verdict on Royal Mail's flotation

[TrueBlueTerrier]

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It’s almost one year on from the Royal Mail’s hysterical public offering, and like a Christmas card forever lost in the post, the underlying message from the debacle has also been mislaid: don’t judge an initial public offering by its short-term performance.

The UK government sold a stake in Royal Mail on October 11 last year at 330p a share, only to see the stock soar 40% on the first day of trading. According to a subsequent report by the National Audit Office, this pop cost taxpayers £750 million.

By January, Royal Mail’s share price had reached 615p. The National Audit Office, politicians and select committees all pointed the finger of blame squarely at Vince Cable and his bankers, who offered “poor-quality advice” to the Department for Business, Innovation & Skills.

But today, 330p looks like quite a sensible price. Royal Mail is currently up 20% from its IPO price, almost the perfect place for company’s share price to be one year after listing.

After all, between 10% and 15% is the accepted discount placed on new firms wanting to come to market, in order to entice new investors to sell out of existing holdings and take a punt on an unknown entity. A 20% increase from its offering price gives the impression of a stable and profitable holding for those early investors.

If the bankers had raised the price, investors could be sitting on a loss. Perhaps, we should be congratulating Mr Cable and his dealmakers, after all?

But wait. Royal Mail’s share price is down 35% from its January peak of 615p, and has been falling ever since. On its current trajectory, the share price may even dip below 330p. If it does, we could argue that Royal Mail was overvalued, and it will be time to bring out the effigy of Cable and his bankers once again.

All of which highlights the pointlessness of basing an argument of valuation on a constantly moving share price, especially during the early stages of a company’s public life.

In the case of Royal Mail, the immediate IPO surge was driven by the combination of a hysterical market and a relatively illiquid stock, not necessarily consideration of the company’s long-term health.

In fact, in its prospectus, the Royal Mail did its best to quell any potential pop, spelling out the array of threats to its business, including the real fear of a strike just when the banks would be offering the shares to investors. Although the strike was avoided, many other threats have come to pass, most notably increasing competition from rival parcel deliverers, explaining its falling share price this year.

The over-reaction after Royal Mail’s listing goes to show the confusion that surrounds the IPO process. Listings are not a form of instant investor gratification, but a vehicle for a company to tap capital markets, and for stakeholders to slowly reduce their holdings.

It’s a shame that capital markets are so misunderstood, as they are vital to promoting growth. The UK and Europe are far behind the US in terms of tapping capital to fund new projects and businesses, and the domestic financing market remains trapped in the hands of the banks, rather than in the debt and equity markets that continue to grow in the US.

One thing is clear. As a result of the hysteria that surrounded Royal Mail, politicians will certainly think twice before risking another flotation, which leaves the option of finding a buyer for state assets in the hands of private equity or sovereign wealth funds, two groups hardly renowned for their ability to grow and develop businesses.

[Ahebban]

Firstly, the price was hyped at the beginning purely so the big city investors could make a killing in the short-term. Secondly, Royal Mail should never have been offered for sale in the first place!