Can’t Tell Difference Between Price And Value: How to Fix and Avoid Mispricing Your IPO Shares

By Mun Siong Yoong on February 04, 2022, 12:16 PM

SPAC Investors: Grab Loses 1/2 Its $40 Billion Valuation In 2 Months

The key question investors should ask is: was the $40 billion estimated using a pricing or valuation exercise?

IPO book runners, i.e. the primary underwriter or lead coordinator in the issuance of new equity, debt, or securities instruments, typically set the IPO price based on pricing, not valuation.


How IPO Share Prices Are Estimated

They study IPO prices of comparable recent capital market listings to guide what price the market is likely to bear for their IPO candidate.

The main challenge with investing based on the ‘Price is what you pay, value is what you get’ approach is this…

You may lose your hard earned savings in the blink of an eye if you invest based on price.

This can be disastrous if it was capital you needed to either fund your kids through school or retire on.

The problem with investing based on price is that price is based on market sentiment.


The Challenges Investing Based on Market Sentiment

Benjamin Graham describes Mr. Market as the irrational or contradictory traits of the stock market and the risks of following groupthink.

Unfortunately, Mr Market’s daily prices are there to serve you, not guide you to identify profitable investments.


Why Valuation Is A Better Guide Than Price

Perhaps it is time to insist that listing candidates be required to conduct a business valuation. One that explains the business model and underlying assumptions when estimating an IPO/SPAC price.

Rather than only look over the shoulder of other recently listed companies and say “We can list at that price too.”

Grab had explained that it faced headwinds as widespread lockdowns in the region due to recurring waves of COVID-19 hurt demand for ride-hailing services and weighed on revenue despite an increase in food-delivery volumes.

While the above was known since the pandemic started in Q1 2020, Grab listed 1 3/4 years later in Dec 2021.

In that space of time not many investors understood the basis for Grab’s IPO price until stock market sentiment shifted against its share price in Jan 2022.

Something for the Institute of Valuers and Appraisers, Singapore (“IVAS“) to study to help retail investors understand IPO/SPAC pricing better?

If a business valuer issued a report whose value range was 50% off course after 2 months, you can bet the regulators will start asking some hard questions.

The stakes are even higher for IPO/SPAC.

Market confidence, like the affections of a jilted lover, once lost is hard to earn back.


If your business aims to raise public capital with confidence through an IPO/SPAC, contact VALLARIS to start a conversation.