Tokyo Drift

SoftBank mobile unit IPO disappoints

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What's going on?

Shares of the mobile telecoms subsidiary of Japan’s SoftBank fell 15% on Wednesday, their first day of trading following an initial public offering. It still netted $23 billion, though… (tweet this)

What does this mean?

Companies usually outline a target price range when “going public” in order to provide flexibility to investors who might buy the shares. They then work out a single initial share price based on who wants what, and at what price. But not SoftBank: in November it announced that it’d sell shares in its telecoms unit at a fixed price of its own devising, defying convention. Although investors agreed to pay up on Wednesday, some made an abrupt about-turn, dumping the shares and pushing their price down in the Japanese stock market equivalent of getting a wedgie on the first day of school.

Why should I care?

For markets: Investors may have seen better returns elsewhere.

The newly listed business’s cash flows are pretty predictable (thanks to long-term phone contracts), potentially making it attractive to investors seeking regular dividends. It’s promising to pay out 85% of its annual profit to investors – initially offering each shareholder a 5% “yield” (i.e. if you owned the stock, you’d get your money back in full from 20 years of dividends). But those returns might’ve seemed less attractive to investors who correctly guessed that the US Federal Reserve would announce higher interest rates later on Wednesday. This makes returns on forthcoming bonds (and cash) a little more competitive compared to stocks – potentially vindicating those who sold SoftBank’s stock earlier in the day.

The bigger picture: Pricing for perfection.

SoftBank sold 90% of the shares to individual investors, as opposed to the large investment companies who gobble up (and trade) most new stocks. A potential downside, though, is a subsequent lack of “liquidity” – i.e. less buying and selling action. If there are a couple of big sellers but no big buyers willing to stump up, then that can exacerbate a stock’s decline.

Originally posted as part of the Finimize daily email.

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