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Zeco: Money train or bubble?

ABOUT 10 years or so ago in the United States, an initial public offering (IPO) was the quickest way to make money. Not just money but bundles of it. This was at the peak of the dotcom era.

During that time, companies without even a cent in the bank listed on the Nasdaq and outperformed all expectations. Coming to the market then were Internet companies, like Netscape although never having made a profit held out the promise that a fortune would be made by enabling access to the web.

VA Linux Systems was another stock which came to the market without ever having earned a penny and still has the crown for the hottest IPO ever.

In fact, the Internet infrastructure company was expected to lose money for years. Without profits and sound balance sheets, recommending analysts opted to value the company at a multiple of anticipated revenues, not earnings.

Other companies to come to the market at that time included Amazon Inc, TheGlobe.com, Pets.com and Infospace.com. When Netscape made its debut, 100% listing gains were a rarity. From an issue price of US$28 per share, the counter rose to as high as US$75 before closing at US$58,25.

It was not long before 100% gains on listing began to be regarded as failures.

Investors had fallen in love with a rosy vision of the nascent Internet age.

They fell hook, line and sinker for the tall stories then peddled by the management, investment bankers and analysts whilst ignoring the risks of betting on firms with little or no income/revenues and only the briefest of track records.

VA Linux Systems, with no income statement and balance sheet, came to the market at an IPO price of US$30 per share. In terms of valuation, this equated to a bizarre 76 times anticipated annual revenues.

This seemingly outrageous valuation was hotly defended by investment bankers and sponsoring analysts. VA Linux was to typify the then new class of “Story” stocks. In simple terms investors were not buying into strong balance sheets, nor the usual investment speak, but buying some story.

VA Linux listed on December 9, 1999 and closed at US$239,25 — a one-day gain of US$209 or 698% a share for those lucky enough to have scored allocations in the IPO.

However, this high-flying success was short-lived and within a year the stock was selling at well below the initial offer price. On July 24, 2002, VA Linux reached its lowest point when it traded at 54 cents and was quoted at US$4,64 on November 26, 2006.

Due to the immense difference between the IPO price and the opening price, VA Linux did not actually raise as much capital in the offering, as it should have. Whilst questions had been raised on IPO valuation methodology, the listing price differential elicited even more questions.

In the last nine months the Zimbabwe Stock Exchange (ZSE) has witnessed three initial public offerings. Two of them, ZPI and Pearl were in the form of equity carve-outs of property holding companies owned by ZSE listed financial services groups; ZHL and First Mutual.

Zeco, which opened this January, is making a come-back after de-listing in 1995. In the intervening period Zeco underwent some ownership changes with the control of the company ending up in the hands of Native Investment Africa.

Zeco made a dream debut on the ZSE. Trading opened at $90 000 per share and closed at $100 000. IPO investors who got their shares at $24 927 could be seen wearing broad smiles. Why not? After all, gains of 301% in a day do not come that often.

The listing beat even the most optimistic of expectations of $85 000, the market consensus being a listing price of at most $65 000. It was thus anticipated that the price would “correct” in the short-term.

On the contrary, appetite for the counter has remained strong with the price actually first consolidating on $100 000 before bolting to Wednesday’s close of $605 000.

Zeco came to the market with a rather weak trading track record. Consequently the selling point was future prospects and assets. So it was a combination of “a future story” backed by a strong asset base, particularly in the Bulawayo factory.

Many seasoned analysts did not buy it, hence subscriptions by traditional institutions like insurance companies, pension funds and asset management companies were negligible.

Support for the IPO emanated mainly from some financially well-resourced individuals, resulting in the offer being 1,6x over subscribed.

After the listing, one analyst summed it up by advising his peers not to look just at the numbers but the people involved as well.

Although most analysts were skeptical about the valuations, the fact that the counter closed on $100 000 means that the company did not raise the amount it should have ideally raised.

The discount is rather steep even after adjusting the issue price for inflation or exchange rate depreciation.

So like VA Linux, the company did not raise as much capital, forfeiting a fair portion to the gains that have been accumulated by IPO investors.

Lastly, for all stock market participants, it should come as rousing news that one of their kind and one from whom most derive their inspiration has been declared the richest man in the world.

In the last twelve months, Warren Buffet’s net worth grew by US$10 billion to US$62 billion and he has overtaken Bill Gates who had held the crown for 13 years.

It is also telling to note that Warren Buffet has not been and is still not a strong participant in IPOs. So if one missed the Zeco opportunity, money can still be made elsewhere.–By Admire Mavolwane

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