IPO fever hots up

Following Royal Mail’s initial public offering (IPO), stock market flotations are on the agenda.

Although it is likely to stabilise over time, the share price of Royal Mail has been up to two-thirds higher than its offer price, leading to accusations of undervaluing.

According to information given at the Business, Innovation and Skills select committee meeting, the secretary of state and the government made the decision on the share price, which was consistent with advice from UBS and Goldman Sachs.

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But not all of 2013’s offerings have been success stories and it is important not to get caught up in the hype. Direct Line’s share price has been 33 per cent higher than its offer price, but esure’s stock has lost 20 per cent since flotation.

In terms of upcoming IPOs, Poundland is in talks to float in early 2014, which could value the company at around £800m. This follows a 15 per cent increase in sales for the year to March 2013.

Richard Hunter, head of equities at Hargreaves Lansdown, said it only deals with IPOs on an execution-only basis, but does background research into the positives and negatives of each particular flotation for its clients.

Commenting on the elevated interest in IPOs, he said, “One would hope it’s largely a sensible, rational choice but there’s an element of emotional drive.” He added IPOs tend to be conservatively priced, ensuring an after-market in addition to the initial flurry of interest.

Mr Hunter said an advantage of IPOs to consumers is that when investing in stock, it is important to have a good understanding of what the company does, and in the case of big companies like Royal Mail, that is more likely to be the case.

Over the past six years, the number of listings and average returns each year has differed greatly.