What is an “IPO by way of introduction”?
I got a few of these questions after Abacore [ABA 1.52 4.11%] [link] announced its plan to issue a stock dividend of shares of its subsidiary, Philippine Regional Investment Development Corp. (PRIDE), to ABA shareholders, and eventually list PRIDE on the PSE using a method called “IPO by way of introduction”.
Let’s just get the easy stuff out of the way first.
Both a “normal” IPO (Normal IPO) and an IPO by way of introduction (Intro IPO) end up in the same place, that is, with a percentage of a new company’s shares listed on the PSE for active trading.
The differences come in everything that happens before (and after) the shares go live for trading.
In a Normal IPO, the underwriter will work with the company or the sponsor to put together a prospectus, figure out the right price to sell the shares at, sell the shares, and then list the shares for active trading.
There’s a lot of information that needs to be disclosed in this process, because it’s a new company and all the participants need to have access to the same information to make informed decisions about whether to invest.
In an Intro IPO, the shares that will be listed are either already listed on another stock exchange, or (as is happening here), will be distributed to shareholders by way of a property dividend by a company that is already listed on the PSE; in either case, the assumption is that there’s enough public information out there already on the shares to do away with that whole price-discovery exercise and disclosure requirement.
When the shares are distributed by a property dividend, the initial value of the IPO shares is supported by a fairness opinion, instead of the whole book-building process that an underwriter would undertake in a Normal IPO.
Once approved by the PSE, the shares are listed, but the fun is only beginning.
Now is where it gets weird. Unlike Normal IPOs, which begin their trading life subject to the 50% price increase ceiling and 30% price decrease floor, Intro IPOs are born onto the market with absolutely no limits of any kind, setting up a potentially wild first day of trading.
MB BOTTOM-LINE
The last time we had a stock list in this way was with Altus Property Ventures [APVI 16.20 5.19%] back in the middle of 2020.
The fairness opinion set APVI’s price at P10.10/share, and when trading started, the first trade was made at P40.00/share and triggered a 10-minute trading pause.
When trading resumed, the price shot up to over P241.00/share in the first 30 minutes of trading.
That’s around a 2,280% increase. Absolutely insane.
Yet, within the hour, the stock was trading at around P100.00/share, which was a huge gain from P10.10, but also a massive loss from P241.
By lunch it was trading at around P30/share. It closed the day at P18.50.
That’s still up 83% from the fairness opinion level, but down 93% from the intra-day high. It was a weird day.
I’m a big fan of spin-offs, and I like the method of listing a company directly this way through a dividend, but I’m not a big fan of the PSE’s weird blind-spot toward the price action of these IPOs.
By not applying any restrictions, the PSE silently endorses the use of these stocks for manipulation and speculation.
Why not apply the standard ceiling and floor limits off of the fairness opinion price?
Why pretend, just for IPOs like this, that there’s no price precedent that could be applied to prevent this kind of wild price action?
Anyway, if you want to read my live-blog format of the APVI IPO, you can do that here. Otherwise, crack your knuckles and get ready for PRIDE, because it’s probably not going to be a quiet little thing.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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