Someone explained to me today that the typical pattern is for a "back-door" company to run up in price before the IPO and then sell off when the IPO is launched. The reason given was that the run up was usually exaggerated. While I am prepared to accept that this might be the historical pattern, I could not understand why.
The following post gives an interesting point of view. It suggests that while there are fundamental reason for that pattern to apply to a parent company spinning off one of its constituent parts, it should not appply to LPGL because it is not a parent company divesting itself of some assets at the IPO, it is an investor whose participation in the new IPO increases in value with the IPO.
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RE Confusion about IPO drop (read this)
by: La_Scienza_del_Dopo (29/M) 1042 of 1046
Everywhere people are confusing a parent company spinning off an asset in an IPO, with an investor receiving pre-IPO shares in a company.
THEY ARE NOT THE SAME THING AND DO NOT BEHAVE IN THE SAME WAY.
LPGL is NOT a parent company of NETP. Berkley venture capital invested money in NETP and received several million shares as equity for the investment.
This is like CMGI investing in a small company and taking them public.
It is NOT like DBCC spinning off Marketwatch.com in an IPO.
The situations are different. In the former, CMGI invests in a promising company at pennies or low dollars per share, incubates the company, and helps it go public.
In the latter case, DBCC LOST A PORTION OF THE COMPANY (Marketwatch.com) when the IPO was done. Similarly, Fingerhut Companies last fall spun out the 83% of Metris that they owned to their shareholders. FHT dropped heavily on the spinoff day because the Metris shares that they owned were no longer part of their assets.
Do not confuse a company investing in an IPO with a parent company that is divesting itself of an asset. THEY ARE NOT THE SAME THING.
Would you expect Softbank to invest in Net2Phone (IDTC's Internet telephony that is to IPO'd in the next month) if it hurt their market cap? No!
But You can expect IDTC to run up on the pre-IPO and then drop off when Net2Phone begins trading, because Net2Phone will be a separate company. (Not very much, however, because Net2Phone costs IDTC money to run, and when gone, IDTC will realize 8 - 10 cents more per share because the Net2Phone costs will no longer need to be accounted for.)
So please, before you make under-informed decisions, think the situation through and understand that LPG is not losing anything when NETP begins trading. NETP was never a part of LPG or its subdivisions, and any capital gain in NETP will be realized by LPGL on a quarterly basis, WITHOUT EVEN HAVING TO SELL SHARES, using their accrued capital gains accounting methods.
For every $1 that NETP trades up, LPG's book value will increase by $2 million. or about $0.40 per share. So if the NETP investment was made for let's say $5 per share, NETP trading at $30 means $10 increased book value for LPGL. |
