Pre-IPO research has once again been in the spotlight in two recent Hong Kong transactions. In both, the issuers were said to have been leaning on brokers to produce valuations that met their expectations.
According to , in the case of the People's Insurance Company (Group) of China's IPO, the banks were allegedly threatened with a downgrade in their pecking order for the underwriters if they failed to meet a minimum valuation in their research reports. Oddly enough, at the opposite end of the spectrum, in the case of the Future Land IPO, one of the joint-book runners was reported in a Reuters article to have been dropped for failing to show a discount to net asset value (NAV) sufficiently attractive to investors.
Research and IPOs make for somewhat uneasy bedfellows and the relationship has been hotly debated ever since the dotcom boom (and bust) of the early noughties.
Pre-deal research is not something retail investors see. It includes information that's consistent with that in the prospectus, but in a way that's easier to read. It dispenses with much of the legalese, and also comprises a tentative valuation.
This, in turn, is used during the two-week investor education process that culminates with the setting of the book-building price range - the top end of which serves as the price paid under the public offer.
Theoretically, research analysts are free from the influence of their corporate finance colleagues. That's a far cry from 15 or 20 years ago. As a junior banker in London, I remember writing a research report after the analyst on the deal jumped ship to another firm midway through the transaction. I also recall doctoring reports to paint the company in a better light. That was a long time ago - it would be unthinkable today.
That said, one or more banks posting valuations at odds with those of the rest of the syndicate can be a major embarrassment - and even threaten a deal's outcome. So, in practice, equity capital markets desks might informally compare notes prior publication. This is not necessarily with a view to changing them, but at least to be aware of any significant outlier - whose firm may perhaps be persuaded not to publish.
