The greatest asset for any listed company is having investor confidence. It is the fundamental pillar that encourages fund managers to invest their money. In contrast, companies often consider that their best asset is to have the share price as high as possible at all times. This is a mistake, because the stock market listing is the consequence of many factors that are outside the control of the companies (regulatory risks, geopolitical factors, level of interest rates).
Trust is the belief or market sentiment that investors have in a company’s ability to generate returns on their investments. Exercise a direct impact on their ability to access the markets and obtain financing, the cost of this, on the share price, its liquidity, volatility and the market value of the companies. It mainly affects the propensity to invest and take risks. The greater the distrust, the less investment.
Generating trust is a continuous process that begins even before going public, during the IPO processes. In recent months we have had some examples whose management could be improved.
Puig Brands has been the largest IPO in Europe in 2024. It is a multinational company that operates in the fashion and beauty sectors. A good communication campaign throughout the IPO process placed the company as a must to have (participate no matter what). It was a large placement, which made it a candidate to be part of the Ibex 35. Its size ensured the liquidity that large funds need to be able to buy and sell without significantly altering the price. The family-controlled company was placed in May at the maximum price of the valuation range. A few weeks later, it became part of the Ibex 35, which automatically generates additional demand for securities that helps maintain or increase the price in the short, rather very short, term. In its first publication of results after the IPO, its net income decreased by 26.5% compared to the previous year, partly due to the IPO expenses themselves. In the best tradition of bad stock market stories, the stock fell 13.65% that day. The departure of investors and the worse prospects for the business have caused the decline to continue to 18 euros compared to 24.5 for the placement, almost 25%.
It is difficult to think that the company misled investors. It is listed in a luxury sector that has numerous listed companies, including LVMH (which includes brands such as Louis Vuitton, Christian Dior or Givenchy) and which is one of the largest capitalization companies in Europe. The company and the sector have enormous visibility and monitoring by investors. lThe company, just as investors were aware at the time of the IPO, of the slowdown in part of the business. It was and is a great company to which investors allowed everything, including shares with different political rights. It is more difficult to know to what extent the placement banks explained the reality of the demand for securities and prices. The fall in the stock market probably would not have been avoided if it had been decided to place at a price slightly below the maximum range. The business is going as it is at all times, but the perception of the company would be different. Who gives up money today to defend an intangible such as market trust that will crystallize over the next fifteen or twenty years? Being a family company, it would be advisable that now that it is raining they were as active seeing investors and explaining the business, as they were in placing maximums. At the end of the day, the investor puts money in and only asks for answers. If there are not, it is very difficult for them to return.
There have been many cases of companies whose results after IPO have been below expectations. Ferrovial, like Puig, came out in May, at the maximum price, with a slowing business and became part of the Ibex 35 immediately. Its first half-year results disappointed the market. They doubled compared to the previous year’s semester, but meeting annual results objectives seemed difficult. The stock fell 5% on the day of publication, 40% at the end of the year and an additional 10% in the following year. It took four years for the listing to recover the starting price. The quality of its assets, a clear commitment to transparency in financial information and a very proactive investor relations program allowed it to turn positive and be considered a reliable company. cyclical evolution of business apart. The company’s value has increased tenfold. It is an exception.
Firms such as Gestamp (2017), one of the best-known global suppliers in the manufacture of metal components for automobiles, or Prosegur Cash (2017) never recovered their IPO prices after their first results after the IPO.
Companies can bet on high expectations of results, which allows, for a given valuation, to come out at a low multiple at the risk of disappointing if results are not achieved. Alternatively, they may give lower earnings expectations, which implies a high valuation multiple that investors are not buying today. A difficult balance. For investors, buying shares in an IPO is a risky decision. They are buying companies for which they only have data from the past and do not know how they are going to manage the future. For this reason, they ask for significant discounts on initial valuations. A 25% setback, as in Puig, affects the profitability of your entire portfolio and discourages you from investing again in other IPOs.
Another example of undermining investor confidence is in how IPOs are structured, even without going public. Europastry is a leader in the frozen bakery dough sector. The company made a first attempt that did not bear fruit before the summer, with a valuation expectation understood as demanding in a difficult environment. He tried again in October with tighter multiples, where he did seem to find investors. Something similar to structuring an IPO at a fixed price. Given the interest at a certain multiple, it is a temptation to present a range to see where said interest remains if you stretch the valuation upwards. This conveys a perception of greed, something very negative for investors. On the other hand, in indebted companies, investors are generally only willing to participate in primary operations, capital increases, where money enters the company. They avoid participating in secondary operations, where the company’s balance sheet is not strengthened, but rather the money goes to the selling shareholder, another symptom of greed, even if it is legitimate. Europastry finally canceled its IPO for the second time this year. Any investor who has dedicated time to it is unlikely to participate in the future unless the multiple continues to decline.
Generating or destroying trust depends on each company. In Buffett’s words, it takes twenty years to build and can be destroyed in twenty minutes. If it is destroyed, forget about the share price for a long time and about having long-term shareholders. These will sell their shares and will not be replaced by the arrival of new investors.
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