MF Global: IPOs Not Easy Money

Ok, this isn’t an endorsement or a short idea… it's more of a rant.

There are those who claim that investing in IPOs by receiving allocations from brokerage firms is easy money and shouldn’t really be included an a portfolio managers returns. I beg to differ on the easy money part. From my perspective, I spend hours each week pouring over prospectuses for companies no one has ever heard about trying to ascertain whether the stock (which has no history) will trade up or down from the original pricing (which is unknown until the actual date it prices).

Granted, usually these deals work out. The underwriters know that if they consistently price deals that do not trade up, they will lose their ability to find willing buyers and the goose that lays their golden eggs will be killed. The problem for me is that on deals that work well, I will indicate with several firms for several thousand shares of the deal, but only get a handfull of shares allocated to me. It is generally known that good deals are oversubscribed (too many buyers, not enough stock) and so when the stock actually starts trading, the price goes up because there is more demand.

This is all well and good, after all it doesn’t pay to be greedy. At the same time, I constantly work on developing relationships with underwriters to hopefully build up my standing with them to get better allocations. Unfortunately, in order to build up these relationships, one needs to participate in most deals that come across the table and some stink to high heaven. I roll with the punches on these and keep track of profits knowing that the good deals will be more profitable than the losses from the bad ones and if at the end of the year we made money, great!

Enter MF Global (MF). At the beginning of the week this deal looked stronger than my breath after a bacon cheeseburger with blue cheese dressing - mmmmmm… It was supposed to be oversubscribed, in a good sector, making money, and growing quickly. And every underwriter I knew was involved in the deal. So I indicated large with all of them… hoping that a few hundred shares here and a few hundred shares there would add up to a decent position to make a nice trade. Wednesday I started getting calls… “Hey, we have some extra stock one of our clients didn’t want… do you want it?” After the second call I knew i was toast.

They priced the deal well below the range (expected pricing was $36-39 - actual pricing was $30) This is also a bad sign. While hopefully a lower price means it is sold at a discount, it usually means they had to mark it down significantly to get people to take the shares. After all the phone calls, I ended up with 51,400 stinking shares. Now to some of you that may sound like chump change. To others, like I bet the farm. In reality its somewhere in the middle. It was a large position for me. I’m not willing to risk so much of my clients assets to put us in danger, but it was enough to significantly cut progress I have made this month.

Needless to say, the stock opened at 28 or so. I cut my position back before it closed around $27.45. But the damage is done and that’s how I lost over $100 grand on a day the market was up 80 points. And thats why IPO money is so easy… to pay for the days like today when it’s not.

Comments

[kurt walter]

I, too, thought MF would be a good deal. But the Fortess and Blackstone deals have proved to me poor for investors lately. I didn't buy any yesterday on the frist day of trading. I am interested in it long-term. I will wait for a cheaper price and then slowly accumulate shares. I would not just buy a large chunk at one time. That is rarely a good idea.