Securities companies set the offering price of an IPO by first determining the fair value based on the PER and other parameters of similar companies. Then a so-called IPO discount is applied to reflect current market conditions. Therefore, once opening prices start falling below offering prices, securities companies use a larger IPO discount.
Market conditions immediately prior to final approval for the listing have a significant impact on the estimated issue price shown in the prospectus. For the October IPOs, which received listing approval beginning in early September, the IPO discount probably increased to between 30% and 40%. In other words, these companies were priced at a PER that is much lower than those of peer companies. This low valuation was undoubtedly a major reason for the high opening prices of the October IPOs.
The October 11 IPO of Sony Financial Holdings raised a total of ¥217.6 billion. By opening at ¥420,000 compared with its ¥400,000 offering price, this issue quickly improved the perception of IPOs among many investors. Following this IPO, there was an October IPO that had an opening price more than twice its offering price.
Looking at the secondary market, 51 of the 105 IPOs of the first 10 months of 2007 were trading below their offering prices as of October 31. But six of the 54 2007 IPO companies that were below their offering prices as of September 30 have since recovered to the offering prices. Japan’s small-company stock markets stopped falling in late September. Prices of recent IPO stocks have all slowly rebounded along with the subsequent recovery in small-company stocks. This upturn will probably lift the stocks of many 2007 companies back to their offering prices as long as earnings remain solid.
In November, there are only seven IPOs scheduled, which is below the average for this month. Furthermore, all seven offerings amount to less than ¥5 billion. This small volume makes it unlikely that the IPO market will weaken because of an oversupply. In fact, since the IPO discount is still large, we will probably continue to see opening prices that are well above offering prices.
The November 13 IPO by Ubiquitous is the month’s most noteworthy issue. Ubiquitous will be the first listing on a new market created by JASDAQ for small companies that have leading-edge technologies. Until now, these companies have listed their shares on TSE Mothers or OSE Hercules. But JASDAQ is finally starting its own market for promising high-tech companies. Ubiquitous relies on Nintendo for almost 90% of its sales. But since Nintendo is reporting strong sales and earnings, this performance will probably be reflected in the stock price of Ubiquitous, too. Ubiquitous will almost certainly play a central role in invigorating the IPO market as 2007 draws to a close.
