How Can "Oversubscribed" be a Sign of IPO Weakness?

By Cydney Posner

Here's an article in The Wall Street Journal contending that, contrary to common understanding, "oversubscribed" may really signal weakness for an IPO.  According to the article, in the current "rough" market environment, "oversubscription" as a measure of investor demand is attracting more scrutiny: it can't really be verified and, for high profile IPOs, may reflect a very high proportion of short-term investors who plan to flip the stock immediately. Usually, a high level of investor "indications of interest" is supposed to be a measure of strong investor appetite for an IPO. However, the article maintains (perhaps in an effort to explain some recent particularly notable nosedives), oversubscription could be especially misleading on marquee deals: "investors routinely inflate their indications of interest, especially on hot deals, anticipating they will receive only a portion of what they request. And during volatile markets, when investor sentiment can swerve from upbeat to negative overnight, deals that appear oversubscribed on paper ahead of a pricing can take a nose dive once they begin trading in real life." Bankers quoted in the article maintain that it can be difficult to price a hot deal to reflect real demand in the midst of the frenzy: "'Sometimes you hear people say a deal is 20 times oversubscribed like it's a good thing. But usually that's a bad thing, because you can't possibly have that many people who really understand your company….Anyone is going to be interested in a hot deal that is supposed to pop. But do you really want to give that discount to a buyer who is going to flip it the first day? If it is 20 times oversubscribed, that's what is likely to happen, and your company will be owned by momentum traders.' "

On a similar note, see also this article in The Wall Street Journal, which adds to the Facebook IPO narrative regarding issues on the investment banking side.

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