Ordinary punter cut out of profit

With an increasing number of Irish companies entering the stock market through initial public offerings (IPO), is it possible for ordinary Irish investors to purchase shares at the IPO price or do we have to wait until the shares start trading on the stock market? At this stage, the share price may have increased significantly, thus reducing the profit for the ordinary investor. T.J.S., e-mail

Institutions avail of bargain price

I recently rang a stockbroker regarding the Trintech IPO with a view to subscribing myself. It was explained to me that first option on this IPO was going to institutions, fund managers, etc, and that if there were any shares left over, these would be offered to the public. I asked why and was told the company did not want a lot of private shareholders with small holdings hoping to make a quick profit as this could lead to share-price volatility.

I was told I could subscribe after the IPO and take whatever price was then on offer. However, by then, the institutions have availed of the bargain IPO price and, it seems to me, by the time a private investor has a chance these institutions and fund managers have made a nice little profit. I'm new to investing in shares but this seems an unfair and restrictive practice. I don't really accept the volatility argument given the involvement of the Nasdaq. IPO is supposed to stand for initial public offering but I don't see this happening in this case. Is this fair and how do members of the public participate in this type of IPO or can they? Mr T.H., e-mail

It is the Trintech Initial Public Offering which has sparked both your questions and the confusion certainly seems to surround the wording of the offer - initial public offering (IPO). As you have both found out, there are times when a public offering is not a public offering, or at least not an offering to all of the public.

The truth is that there is nothing to stop a company like Trintech, or anyone else for that matter, setting parameters on its desired shareholder when it goes public as long as it clearly states its intended method of allotting shares in its prospectus.

A copy of this prospectus is available to all potential shareholders and it outlines what the company is offering and to whom.

Finding out about such Initial Public Offerings is the first step and there are two basic ways of doing this.

The first is through a stockbroker. It is the business of brokers to be aware of upcoming flotations and they are certainly in a position to pass this information on to their customers. Subsequently, they would be able to apply for shares on behalf of their customers, provided such customers fell within the groups eligible to apply for shares.

Of course, not everyone has a stockbroker. In this case, you are most likely to discover information about upcoming initial public offerings through the media.

Companies going public and their advisers publicise their intentions for obvious reasons. After all, the greater the interest, the higher they are likely to be able to set the price and the more money they will net from the move. However, once you know their intentions, you can then go to a stockbroker and seek to buy shares at the flotation price. You could, in theory, go to the company itself, but I would be surprised if it did not pass you on to a broker.

The rules can vary slightly from exchange to exchange and Trintech was floating on both the German Neuer Market and the US electronic-based Nasdaq market.

You both point out that one may have to pay a significant premium to purchase shares at their market price after the flotation date and that this allows the big institutional shareholders an unfair advantage in that they can maximise the gains on the basis of the lower IPO offer price.

It is worth remembering that the opposite can also be true. While any company going public will aim to pitch its initial public offering price at a level which, all things being equal, guarantees a gain for those initial investors, there is nothing absolute about the process.

A brief glance at the travails of Eircom - Telecom Eireann as was - will provide ample evidence of how things can go either way for shares on the market.

Of course, some shares are more volatile than others. Technology and telecoms issues seem to be particularly prone to the yips at present while other sectors are specifically seen as sound bets in less favourable market conditions. It is also true that some markets are more volatile than others.

The Nasdaq market is seen as one of the most volatile, designed for fast-growing companies with investors who demand continual and sizeable progress and swiftly punish any slip-ups. That is expressly why Trintech chose to float also on the more sedate Neuer market in German in an effort to encourage price stability.

Mr T.H. points out in his letter that the desire to avoid volatility was one of the reasons quoted by his broker to explain why Trintech preferred to have only institutional investors. It is true that smaller investors can be more volatile and less likely to look to the long term than their institutional counterparts, but, of course, it depends on the individual investor. It is also true that volatility was a concern for Trintech after the hammering received in the US by CBT and Iona from fickle Nasdaq investors.

At the end of the day, Trintech, or any other company, has a responsibility to its current owners as well as its new shareholders to ensure that it is stable and has a viable future. It may not sound fair, but if such a company believes the best way to ensure stability is to stick with the big boys and it states its intentions clearly in the prospectus, there is no reason why it cannot do so.

Please send your queries to Dominic Coyle, Q&A, The Irish Times , 11-15 D'Olier Street, Dublin 2, or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suit- able queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.