Stock markets are in turmoil, volatility indices have rocketed and the Dow Jones has seen its biggest ever single-day losses. Why then, would you choose now to launch Germany’s biggest IPO in decades?
That’s a question that engineering giant Siemens must have been asking itself in the past few days as it prepares to float its healthcare unit Healthineers. But the firm’s answer has been simple: carry on regardless.
The IPO will be announced in the next few days and completed by Easter, financial sources said. It will raise up to a reported €7 billion ($8.6 billion), which would make it the second biggest IPO since Deutsche Telekom went public at the end of 1996, pumping more than €10 billion into government coffers.
Siemens CEO Joe Kaeser is evidently unperturbed by the global slide in share prices that saw the so-called fear barometers, the volatility indices VIX in the US and VDAX in Germany, reach their highest levels in years. Daily stock market losses in New York reached extreme levels of up to 4.6 percent.
When big firms go public, the market rewards them for having established and stable business models. Jens Kengelbach, partner, BCG
Such conditions tend to be toxic for IPOs. But Healthineers, along with Deutsche Bank fund management subsidiary DWS, which also plans to go public in an IPO expected at around €2 billion, have responded by stepping up their efforts to persuade anchor investors such as sovereign wealth funds to subscribe to their share offerings, sources said.
Getting big investors on board helps reduce risks for large scale IPOs, said Nick Gradel, who heads Barclays’ German IPO business. But there will likely be a price: Institutional investors tend to demand a discount of up to 10 percent on the fair value of a stock in mega-flotations.
DWS, in fact, has almost completed preparations for its IPO and could go ahead at short notice. “We expect to be able to proceed with the partial flotation in the next possible window provided that market conditions and the final regulatory approvals permit it,” said Deutsche Bank’s chief financial officer, James von Moltke.
It would put 2018’s bumper IPO schedule back on track. If markets calm down, law firm Baker McKenzie’s prediction of global IPOs worth $290 billion could still come true, which would be close to the all-time record of $300 billion seen in 2010.
Germany, too, promises to have a buoyant year thanks to the strength of its economy, continued ultra-low interest rates and strong corporate earnings. Stock valuations remain high.
Martin Steinbach, a partner at consultancy EY, expects 13 to 18 flotations in Germany this year despite the latest market volatility. Bankers and advisors expect IPOs to reach a total volume of well over €13 billion, which would make 2018 the best ever IPO year for Germany since the record of 2000 at the height of the dotcom boom.
Across Europe, bankers expect 25 big IPOs after Easter. “A lot of newcomers are getting ready,” said Mr. Gradel at Barclays. “Given the current increased market volatility, there really are a lot of candidates coming to the market.”
The German DAX index recovered some ground on Monday and was little changed on Tuesday after heavy losses triggered by declines on Wall Street over the last two weeks.
For the time being, Siemens has reason to be undeterred thanks to the size of Healthineers. “Small and medium-sized companies seeking bourse listings tend to be worse affected than large caps like Healthineers and DWS because they have a less focused and less diversified business model and may not be so liquid,” said Michael Muders, a portfolio manager at Union Investment. It takes longer periods of turmoil to throw large IPOs off track, he added.
A recent study by Boston Consulting Group found that investors in large companies in Europe tend to fare better than those who invest in smaller businesses. The research, based on almost 500 IPOs between 2010 and 2017, showed that the share prices of almost three quarters of newcomers with revenue of at least €1 billion outperformed the stock market index after one year. With firms with revenue of up to €50 million, the percentage was far lower at 45 percent.
“When big firms go public, the market rewards them for having established and stable business models,” BCG partner Jens Kengelbach told Handelsblatt. Shares in Covestro, the former polymer division of Germany’s Bayer, jumped 118.2 percent in their first year, for example.
There’s a further reason why mega-flotations tend to be a better bet for investors than small IPOs. “When business divisions or large companies go public in a difficult market environment, the shares are often offered at a marked discount,” said Mr. Kengelbach. “This price cut means that the subsequent performance is significantly better than with small issues.”
In the end, the business model and the quality of a company’s management are the overriding factors because they don’t change whether share prices are rising or falling, said Mr. Muders, the Union Investment fund manager.
Analysts say Healthineers, whose products include X-ray and MRI machines, is well placed in a growing market. Research firm Redburn values it at €36 billion and Barclays expect its operating profit to grow 7 percent per year through 2020.
Other big German IPOs planned for this year include engineer and world-leading brake maker Knorr-Bremse and science publisher Springer Nature. They are expected to fetch up to €4 billion and €1 billion respectively.
Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. To contact the authors: [email protected], [email protected]