Pricing pressures

Controversy surrounding so-called ?competitive IPOs? has been reignited by the planned flotation of UK business travel group Hogg Robinson. The firm, which is backed by London-based buyout firm Permira and is expecting to be valued at up to £700 million (€1 billion; $1.3 billion), is employing what a Sunday Times report recently described as ?a controversial technique that has been scrutinized by the Financial Services Authority (FSA).?

In a standard IPO, the lead manager and other brokers are appointed at a very early stage of the process, forming a syndicate of brokers. Under competitive IPOs, the syndicate members, their roles and remuneration are not defined until late in the process. According to a report on the subject by the FSA in November last year: ?In a competitive IPO the issuer may be able to exert pressure on the competing firms, directly or indirectly, to produce research that is favorable or which justifies a higher valuation range. This is because firms could be providing their draft research to the issuer in circumstances where the firm is still trying to win a role in the syndicate.?

To detractors, this creation of competitive pressure between wouldbe broking syndicate members runs the danger of IPOs being aggressively priced and resulting in poor after-market performance.

However, defenders of the process say that, rather than producing over-aggressive valuations, it actually leads to more realistic pricing. They contend that in ?traditional? IPOs, the valuation tends to drop between the mandating of brokers and the execution of the IPO. This, they say, is because once the economics of the deal have been agreed, brokers lose their incentive to obtain the keenest possible pricing.

The competitive IPO is not new. The first example in Europe was believed to be the €1.25 billion listing of French yellow pages business PagesJaunes in July 2004, while the first British case came with the £1 billion listing of satellite operator Inmarsat (another Permira-backed company) in June 2005.

Such deals helped prompt the FSA report, which offered guidance to firms taking part in competitive IPOs, such as ?to ensure that research that they publish is not held out in a way that that could be misleading to the intended recipients.? Whether the FSA once again intervenes in the debate may depend on whether the competitive IPO moves from the margins to the mainstream.