Tue. Oct 19th, 2021


IPO Updates

Given the sky-high valuations achieved by newcomers to the market, it is fitting that their prospects are equally ridiculously large. US-listed travel appointment programs Didi and Uber both bombarded future investors with about 400 pages of information. Paytm, listed in India, this duo got the best this month with a “red herring” of 500 pages, as preliminary prospects are known.

This is a massive page inflation. Microsoft, which went public in 1986, said everything it needed in 50 pages. A few decades later, Google weighed in at 230.

Maybe life back then was just easier. Bill Gates has reportedly appointed Goldman Sachs to launch Microsoft’s initial public offering on the base that they did not waste their food and “looked like good guys”.

Microsoft was also profitable and cheap, more than can be said for a large portion of the current number of debutants. Despite this higher price than Gates wanted, the value of the shares is 5.5 times lower than the income. This is a quarter of the price guaranteed by the recording software manufacturer Qualtrics (Prospectus of 250 pages) 35 years later.

There is little connection between the size of a prospectus and the market capitalization. In Europe, the document for a business below € 150 million is on average only a third shorter than the value worth € 1 billion plus, says Oxera, a consultant. Nor is it related to an extended period as a private company: Microsoft spent just as much time in private hands as many of today’s debutants.

Length map of prospectus documents in terms of number of pages, per country.  This shows that the average length of the Italian prospectuses is more than 800 pages

Regulations, including provisions under Sarbanes-Oxley, only partially explain the detail. Just as complex. Some of the feed in today’s prospectuses is simply in kindergarten. Photos and flow charts filled Meituan Dianping’s 700 pages.

For investors, more is not necessarily better. The risk settings of the hob are so wide and long that it is useless. Alibaba’s large – scale IPO was accompanied by many warnings about the legal gray area inhabited by the structure of variable interest rates – just like every subsequent Chinese offer. Train shock waves about such structures resonates once again.

Bar graph of the average number of words in liases showing the age of verbality

Investors blush at Didi Chuxing’s admittedly steep regulatory roadblocks may have struggled to get past page 3, where the company warns: ‘Our business is subject to numerous legal and regulatory risks that could adversely affect our business and future prospects.’

Standardization discourages investigation. Companies followed Google’s lead to showcase their civilian streaks, but added new, often useless, statistics. Total accountable markets are a good example. Deliveroo claims a TAM of 1000 times the size of its real revenue in 2020. Time to cut prospectuses – and fantasy metrics – to size.

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