A heaving stock exchange floor filled with men waving bits of paper feverishly in the air is an image we all have in our mind’s eye, but it’s an anachronism – replaced long ago by the silent stealth of global computer networks.
Yet such a scene is the perfect metaphor for what happens on the opening day of a long-anticipated initial public offering, like Twitter's IPO, which is heading to market in New York in the coming weeks.
One important measure of an IPO’s success is its performance on day one.
Investment banks like Goldman Sachs and Morgan Stanley spend months drumming up interest in an IPO until it reaches fever pitch.
In turn, specialist global public relations firms, such as Brunswick and Rubenstein, ply the financial news media with tantalising stories that swell interest further still.
Their aim is to ensure that demand for stock exceeds supply by such a wide margin that the share price is driven to ecstatic heights in a single session, heights that might on an ordinary day’s trading signify that perhaps something untoward was afoot – insider trading say, or a rapidly inflating speculative bubble.
Arguably both of these things might be happening given the volume of information pumped out by underwriters and PR companies in the months leading up to any listing, coupled with the nonsensical rush for stock at any cost that goes along with a well publicised IPO.
This common IPO phenomenon, that is all too familiar with technology stocks, came unstuck last year when Facebook came to market, however.
On its first day of trading Facebook sold more than 420 million shares for US$38 each, raking in $16 billion to become the biggest technology IPO and the third largest listing in America's history.
But the success was short-lived.
On day two the price slipped below the listing price as a market, chastened by four years of global economic turmoil, faced up to the reality that revenue generation wasn’t going to be all that easy for a company with millions of users, few of whom had ever handed over a dime for the privilege of logging on.
Facebook had been expected to become the next eBay in terms of stock market performance. The online marketplace is credited with being one of the most successful IPOs of all time as its share price increased by 1,000 per cent in just six months on the market – largely thanks to the dot-com boom of course, but still, the return was made.
But clearly we are in a new era for IPOs, an era that Twitter will have to work to its advantage. As will the companies that have signalled an interest in listing in the UAE over the coming months.
Companies like Just Falafel, the fast-food retailer, which has hired advisers to look into a Dubai IPO. They would follow Bank of London and the Middle East, Britain’s largest Islamic bank, which completed an IPO on Nasdaq Dubai a few weeks ago, and there are rumours of many more.
These companies will do well to remember that an IPO is about much more than day one.
A well-functioning stock market, and the IPOs that come with it, is a collective force for prosperity born out of necessity.
In 18th-century America, traders and shippers would gather under a buttonwood tree in what is now downtown Manhattan to exchange ideas and propositions with investors. If the investors liked the sound of whatever caper the traders proposed, they would fund it in return for a share of the profits.
The New York Stock Exchange, which stands close to where that buttonwood tree grew, performs precisely the same function. It is a magnet for investors to fuel the profits of tomorrow.
The UAE’s economy is in a different phase.
Its key engines of growth – oil, property development, telecoms and even tourism and hospitality – are led by companies with a significant reliance on the state for capital.
These economic powerhouses do not need to gather at the buttonwood tree to fund growth and prosperity, so they do not truly need a stock market.
To create a real need for a stock market, more companies that play a central role in the UAE’s economic development should consider floating larger stakes on the ADX and DFM. This would bring greater liquidity and spur investor interest and confidence among prospective market constituents.
Then we need a clear and unified regulatory framework for the whole country, and perhaps a clear and unified single stock market to go along with it.
Currently we have three stock markets and two regulatory bodies, with the prospect of even greater complexity on the horizon with the launch of the Abu Dhabi Global Market (ADGM) financial free zone on Al Maryah Island.
The launch of ADGM, however, presents a great opportunity to create the streamlined and unified national financial sector with the state-of-the-art functionality and oversight that we need.
If it succeeds in this, the UAE will be well positioned to jump aboard the global IPO party on the horizon – and many more to come.
jdoran@thenational.ae
