May IPO Market Summary and Outlook for June
There were three IPOs in May, one each on the TSE Mothers, OSE Hercules and Sapporo Ambitious markets. Every year, there is a sharp drop in the number of IPOs in May, just as in January. The main reason is that the Golden Week holiday, which starts at the end of April, extends the time required between the approval of a listing and the start of trading. Consequently, companies generally avoid scheduling an IPO for this period. In fact, the number of May IPOs has been consistently low: four in 2000, six in 2001, four in 2002, two in 2003, four in 2004, three in 2005 and three in 2006.
In terms of the number of IPOs, May 2007 was similar to other years. But the month was very different in terms of opening prices. Backed in part by Japan’s IPO boom in recent years, the opening prices of May IPOs have often been far above offering prices. This is mainly a reflection of a shift in the supply-demand equation in May caused by the much smaller supply of IPOs. Capital in small company stock markets was concentrated on only a few issues. But in May 2007, the opening prices of the three IPOs were only 28% higher than their offering prices on average. This is slightly below the 38% average opening price premium for all IPOs during the first five months of 2007. The relatively poor performance of May 2007 IPOs was probably due to low prices on Japan’s three small company stock markets. The JASDAQ, TSE Mothers and OSE Hercules indexes all hit new 2006-2007 lows in May, causing investors to turn their attention to other markets.
Despite the weakness in these three markets, the 59 IPOs of 2007 are performing somewhat better on the secondary market than the 2006 IPOs did. The market prices of only 24 of these 59 IPOs, well below half, were less than their offering prices at the end of May. Significantly, market prices exceeded offering prices at more than half of the 2007 IPO companies that conducted their IPOs at least three months ago. This demonstrates that weakness in small company stock markets is forcing companies to use lower offering prices.
There will be 14 IPOs in June, a big decline compared with the 26 IPOs in June 2006. Typically, companies with a March fiscal year account for a large share of June IPOs. This is the last chance for these companies to conduct an IPO based on prior-year financial statements. This year is no different: nine of the 14 IPOs are by companies with a March fiscal year.
Allow me to elaborate on this point.
The financial statements of Japanese companies require the approval of shareholders at an annual meeting held within three months of the fiscal year end. Since these official financial statements must be used for exchange listing applications, a March fiscal year company cannot begin the application process until after its June shareholders meeting. This is why we see a large number of IPOs starting in September each year.
Naturally, it is impossible for every March fiscal year company planning an IPO to begin the application process following the June shareholders meetings. Many companies require more time for preparations. Companies are allowed to use their official financial statements for listings up to and including the day before the next annual shareholders meeting. Because of this deadline, some companies end up conducting “last chance” IPOs based on prior-year financial statements even though they have announced earnings for the following fiscal year.
However, some March fiscal year companies that have applied for a listing require more time than expected to complete the application process. If they are unable to conduct an IPO prior to the June shareholders meeting, these companies will have to use the new financial statements instead and wait until at least September.
All three May IPOs were relatively small. As a result, they did not disrupt the balance between supply and demand on small company stock markets. This probably explains why the opening prices were relatively high. In addition, since the downturn in small company stock market indexes may finally be over, we might see a rebound in the prices of 2007 IPO stocks that have dropped along with these indexes.
In June, the June 26 IPO of UBIC is of particular interest. Compliance activities are becoming increasingly important in Japan due to the recent enactment of the Personal Information Protection Law, the Company Law and the Financial Products Exchange Law, which is often called Japan’s version of the Sarbanes-Oxley Act. UBIC offers IT services for compliance programs. In addition, UBIC’s president Masahiro Morimoto has an unusual background for a Japanese CEO because his career includes military service.
Nishibori Takashi
Tokyo IPO.com Chief EditorEmail to :editor@tokyoipo.com