Mention “pulled IPO” to irish finance professionals, professors or journalists of a certain age and Guinness Peat Aviation comes to mind. GPA tried, but failed, to float, in 1991. Amongst those who lost money were, famously, Garret Fitzgerald (who had a chunk of his debts forgiven). It subsequently went belly up, but in fairness out of its experience and assets were born many other, ultimately successful aviation leasing companies. And now we have Digicel – what will its afterlife be?
The failure to launch of Digicel’s IPO, leading to it being called DidnCell in some quarters, has prompted questions as to why it didn’t go as planned. At one level the issue is perhaps not that hard to fathom – a primarily emerging markets, FX complex play was going to be tough with global economic conditions deteriorating and in a cooling IPO market. At another extreme there are even hints from Denis O’Brien that the alleged conspiracy he is litigating was designed in part to nobble the IPO. The reality is that the Digicel IPO hits all the buttons for a pulled IPO. Which raises a second question What do we know about failed IPO companies afterlife? Digicel are, typically, bullish, shrugging it of as no big deal.
Academic research on the issue of the causes of IPO failure or being pulled is not that extensive. That said we do have some evidence on both numbers and causes of IPO failure.
Early research looked at the USA in the 1980s and 1990s and found that approximately 85% of IPO’s proceeded. But of course, that means 15% did not and were withdrawn. These were most likely to be found in primary industries, mining and construction and so on, than in services such as telecoms. A number of characteristics were strongly associated with the decision to withdraw. Most prominently in the case of Digicel companies that had high levels of debt, who were issuing shares to pay down debt, who were going for IPO where the original owner would retain significant shareholdings, these were the companies which would withdraw from the process. Digicel was a posterchild for all these.
More recent work has looked again at these factors, but also at the afterlife of pulled IPO’s. They confirm the earlier findings on the characteristics of pulled IPO’s. They also find that only 10% of companies that pulled IPO’s in the 80s and 90s returned to the market, ever. Of the successful revenants the mean time to reissue was in excess of two years. Return is strongly associated with general market conditions, revenants usually taking advantage of a “hot” market, with lots of other IPO’s on going. The only other element that really seems to differ is the interest rate, with falling interest rates also strongly associated with return. Those that do successfully return also tend to switch underwriters for more highly ranked banks. In the case of DigiCell with JPMorgan and Deutsche two of the main underwriters that will be difficult. Those that do switch are able to raise significantly more capital than those that do not.
Particularly in weak(ening) capital market conditions, there is a strong relationship between the CEO ownership and withdrawal. O’Brien was to have retained 94% of the voting rights post IPO. Companies which, like Digicel, had planned to use the capital to pay down debt (as much as 1.3b of the 2b were to be used for that )were also much more likely to be forced to pull. We also see a significant issue around venture capital. Digicel, O’Brien and Venture capital go together but, from the perspective of an IPO, in the wrong way. There is a strong relationship between the existent, and extent of venture capital backing and a successful IPO. IPO’s that have strong venture capital backing are 20% more likely to return than those that do not. We have no evidence on the effect of being , in effect, a venture capital provider. Far from being a strong suit, as Digicel seem to think, the evidence is that lack of VC backing gives a poor signal. Finally, all things being equal, revenants give lower first day returns than do those that succeeded in the first place in getting the IPO away.
Further research suggests that there is indeed a significant negative valuation signal from an IPO withdrawal, as companies which pull but are subsequently taken over or merge gain less than pure m&a. Indeed, there is strong evidence that companies that withdraw are at significantly greater risk of bankruptcy than those that do not. To some extent this may be down to excessive risk taking post failure, something Digicel would need to watch for. The ultimate fate of pulled IPO’s is also interesting: looking at nearly 600 pulled IPO’s in the 200-4 period research found 13% of withdrawing issuers return for a successful IPO, 36% were able to raise capital privately 42% either merged or were acquired with 11% filing for bankruptcy.
What of more recent times? Some work which I am undertaking with a research student focuses on the nature, determinants and extent of IPO withdraw and resurrection since 2000. Looking at the USA we find that the extent of withdrawn IPO’s is a little higher, perhaps up to 20%, than was the case in the 80’s and 90’s. For Europe it is lower, in the high teens. So, the ex ante probability of a IPO not going the full distance is reasonably high. This may in part explain the well known phenomena of high first day returns on IPO’s – it is a part payoff for risk that the IPO might have been pulled at any stage.
Research does not bode well for Digicel returning to the markets soon. That is not to say that it cannot, but that it would be unusual. More usually companies such as Digicel are taken over. Our final piece of evidence  is that when a IPO is pulled the effect is to enhance the valuation of all incumbents in the market. This can be up to 4%. As Slim is worth $80b, the pulling of the Digicel IPO could be worth nearly as much to Slim as the entire IPO was to raise. This puts Denis O’Brien’s wealth in perspective and it would be ironic indeed if he were to lose the source of that to a competitor made able to do so by the very failure he is shrugging off.
Shown below are the two titans of Emerging Markets telecoms, scaled to relative wealth (6.9b v 80b). Whom would you bet to win?
 The option to withdraw IPOs during the premarket: Empirical analysis Busaba W.Y., Benveniste L.M., Guo R.-J. (2001) Journal of Financial Economics, 60 (1) , pp. 73-102.
 Second time lucky? Withdrawn IPOs that return to the market Dunbar C.G., Foerster S.R. (2008) Journal of Financial Economics, 87 (3) , pp. 610-635.
 To IPO or not to IPO: Risks, uncertainty and the decision to go public Latham S., Braun M.R. (2010) British Journal of Management, 21 (3) , pp. 666-683.
 Acquisition valuations of withdrawn IPOs: When IPO plans turn into mergers Lian Q., Wang Q. (2012) Journal of Banking and Finance, 36 (5) , pp. 1424-1436.
 Self-selectivity in firm’s decision to withdraw IPO: Bayesian inference for hazard models of bankruptcy with feedback Chen, R., Guo, R. -., & Lin, M. (2010).. Journal of the American Statistical Association, 105(492), 1297-1309
 The new game in town: Competitive effects of IPOs Hsu H.-C., Reed A.V., Rocholl J. (2010) Journal of Finance, 65 (2) , pp. 495-528.
Published as a column in Irish Examiner 23/10/15