Wednesday, April 14, 2010


From IPO effect...

Since about 20 years we know that stock performance in IPO's is often not exactly fantastic. True, sometimes crazy hypes lure new investors into excess demand. Initial day returns are often above average due to underpricing often introduced on purpose by the underwriting investment bank(s). But in the majority of cases we see that stocks will underperform the index in the months/year after the initial public offering. One of the other reasons being that IPO's are often accompanied by the issue of new shares. With equity capital being more expensive for the firm than debt: why does the firm issue equity just now? What does management know what we don't? Never forget that firm management is an insider when moving from private to public status. All too often they are also sellers when they want us to buy.

IPO's: Road to Riches? 
Or guaranteed recipe for disappointment?

To bonus craze...

It is interesting to see the reaction to excess bonuses these days. Due to the global crisis and its aftermath investors all around the world are far more sensitive to large salaries and bonuses for top management than they used to be in the past. Too often the variable component of remuneration was linked to indicators that were not directly linked to the top manager's personal efforts and qualities. And too often they were one-sided, call-option like variable components that provided only for possible upticks with no downside risks. There was a growing number of research reports and columns in the popular press indicating that this one-sided character of the variable components was to some extent responsible for the crisis. Bonuses with just upside potential and no downside risk would lure managers into excess risk taking. And even worse: too often there was no direct linkage between stock performance vis-a-vis a benchmark and/or sector peers on the one hand and bonus size / remuneration package on the other. The nepotists weren't necessary the better performing managers.

And the combination of the two: the Rusal case 

The January IPO by Russian Aluminum giant Rusal on the Hong Kong and Paris stock exchanges was no exception. Today the Financial Times reported about the Rusal IPO, making it clear that Russian oligarch Oleg Deripaska - the CEO of the firm - got himself a shocking remuneration package consisting of a USD 70 million bonus package that came on top of a USD 10 million salary. Far higher than what his colleagues at Rio Tinto and BHP Biliton received. And this is even more shocking when we know that the packages received by the CEO's of the latter two firms weren't exactly poor payment either. Didn't they deserve it because of solid performance in 2009? No, because the 2009 recovery wasn't that much more than a normal recovery after the 2008 crisis. I.e. the recovery wasn't really related to their performance but simply the result of markets recovering from an earlier craze.

Oleg Deripaska, Russian oligarch and Rusal CEO:
EM example of today's bonus craze?

With CEO's from Emerging Markets firms receiving remuneration packages better than what their developed market counterparts receive, we know that Globalization really is a factor these days. But what to do: salary maximums? Better bonus structures with fairer performance indicators? Higher taxes for excess wages? Probably a combination of all of these together, and added to that more transparency that helps reveal the cleptomania. And last but not least, assertive shareholders.

Will be continued, and as we see here not just when analyzing salaries in the Developed Markets financial sector....

When comparing share price performance of Rusal on the Hong Kong stock exchange since its introduction in January vis-a-vis the general (Hang Seng) index, the firm's share price dropped 12.7 percent vis-a-vis the initial listing price whereas the index gained about 10 percent during the same period! With Hong Kong oligarchs Robert Kuok and Li-ka Shing on the buying list in this IPO we wonder if they were very amused. Or did they buy to strengthen their ties with Oleg Deripaska, something that might be of value in future deals outside the Chinese city state? Complications, complications...

Investors shouldn't be afraid to miss out on opportunities

Therefore: outside equity investors considering a participation in an IPO and/or firm paying excess bonuses or high salaries should be calm. Is this really a smart thing to do? There is always an alternative or next chance. You never have to participate in fishy proposals and there isn't such a thing as 'the only' or 'best ever' proposal. Compare, compare, compare and buy when others don't in a contrarian way. This adage holds both in developed and emerging markets.

Click here for the original Financial Times article on the Rusal IPO and Deripaska's and other board member's remuneration packages

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