Face-off
There are lessons to be learnt from the flotation of Facebook (FB), which I was never tempted to join (the flotation, that is, not Facebook itself). The Millennium boom and bust is still too raw in my memory.
So what can we learn this time round?:
Too many bankers spoil the float. No fewer than 33 banks, plus an array of other advisers, worked on the float. That mopped up anyone who was likely to offer an independent view of the value of the shares and silenced anyone who might suggest that the shares were overvalued.
The price is only too right. Setting the float price is a sophisticated affair, carried out through book building. That means that advisers can run round finding out how many investors are prepared to buy how many shares at what price. Thus the float price can be pitched at the highest possible level, leaving little or no scope for quick profits for investors. When a flotation is as overhyped as Facebook, the scope to ramp up the share price is considerable.
The share price is a moveable feast. Companies coming to market initially set a very wide price range for the shares then narrow the range down as reaction is gauged. Usually the eventual price is set within the initial range. It is hard to say which is worse, a price that falls below the initial range, indicating that the company may have problems, or a price that beats the early estimate, in which case the shares are almost certainly overpriced. Facebook not only raised its $28-35 range up to $34-38 part way through the book building process but eventually floated at the top of the new, higher range, an indication that investors had been caught up in a stampede.
We're only here for the money. The advisers got the shares away at a high level. That was their job and they have to earn their generous fees. Too bad that the price fell heavily in the second day of trading and have subsequently slipped back further. Investors are only in it for the money. So are the owners of the company coming to market and its advisers.
It is only 12 years since the tech boom went bust and only nine years since the bottom of that vicious bear market, yet investors seem to have forgotten the lessons that were learnt so painfully then.
Wet, Wet, Wet
Poor retail sales for April, and results from Marks & Spencer Group (MKS), reinforce my view that the sector is mainly one to avoid.
Admittedly the April figures were distorted by panic buying of petrol in March and the subsequent slump the following month when motorists started with full tanks. But even stripping out this effect, retail sales overall were down 1%.
Once again the unseasonal weather has been blamed and there is no denying that April was unusally wet, so summer clothing stayed on the shelves. But in a sense this is the point. Retailers see costs rise and margins squeezed while guessing what will sell.
Those figures followed annual results from M&S showing a fall in profits from £780 million to £658 million despite a 2% rise in turnover. M&S is not alone in selling more to make less profit. Chief executive Marc Bolland says other retailers are cutting prices aggressively so we may well see sales falling as well as profits.
In all the circumstances Bolland has not made too bad a fist of it, mainly because of celebrity advertising and the refurbishment of some stores. However, that all costs money.
The dividend is maintained and there is no reason to fear that it will be reduced in the foreseeable future. The yield is 5% and the P/E is undemanding so I see no compelling reason to dump M&S if you are already in it for the long term. Nonetheless, the situation is hardly inspiring.
Two's A Crowd
More news from two companies I love to hate.
First, Thomas Cook (TCG) has sold its 77% stake in its Indian business for GBP 94 million, a very welcome input of cash for a company that had to be bailed out by its bankers in November. The deal comes on top of a GBP 183 million injection from the sale and lease-back of its planes.
Reducing debt is good, especially when you are in dire straits, and it is easier said than done. But I worry that Cook is shrinking. The shares have edged higher towards 20p compared with a low of 10p after disaster struck. It is a chance for those who failed to face reality in time to cut their losses and get out. Do not be tempted by the massive historical yield. The future looks thin.
Another misfortune has befallen BP (BP.), whose relations with its Russian partners goes from bad to worse. The Russian joint venture BP-TKN has suspended its dividend because a very important director has resigned and under the joint venture's own rules there cannot be a dividend until a replacement is found.
The director in question is an independent nominated jointly by BP and the Russian billionaires. He or she is in effect an arbitrator between the warring factions. The difficulty is to find someone of the right calibre who is prepared to step in to a thankless position. The Russians will be in no hurry and any delay puts more pressure on BP and its own dividend.
Please, Mr. Postman
Chancellor George Osborne will gaze wistfully from the window of No. 11 Downing Street this month as the postman passes him by. For the first time since Osborne took office, there will be no letter from the Bank of England Governor Sir Mervyn King explaining why inflation is above the 3% ceiling.
The Consumer Price Index showed inflation at 3% in April, down from 3.5% in March. That still means that prices are rising much more quickly than wages but the squeeze is easing a little. We have a long way to go but it is a step in the right direction.
Weekly Market Movements
Monday, May 21 – Friday, May 25
FTSE 100: 1.55%
FTSE 250: -0.15%
FTSE All Share: 1.30%
FTSE Small-Cap: 0.50%
FTSE Fledgling: 0.21%
FTSE AIM 100: 1.11%
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