Tuesday, September 27, 2005

Why is the Dana Gas IPO so oversubscribed?

To put it another way, investors appear to believe that the IPO is substantially underpriced. Why would the founders of Dana Gas underprice the IPO? Don't they want to realize the greatest gain possible for themselves from going public?

I asked this question to a colleague in finance. He had a ready suggestion. Could it be that the founders of Dana Gas are intentionally giving away wealth to GCC citizens? Could it be that the founders are part of the ruling class that controls the oil resources, but also distribute some of the wealth back to citizens in order to retain their support? Other ways of sharing the wealth include obvious ways such as increased social support for citizens on low incomes, and less obvious ways like paying citizens above market salaries in government jobs, or subsidizing the price of petrol at the pump.

Note that an underpriced IPO that places limits on participation by noncitizens - like Dana Gas - is similar to the idea of making each citizen a stockholder in the country's oil wealth. See my recent post here for links that elaborate on this idea.

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Blogger muscati said...

Dana Gas is a massive IPO which asks people to invest in a company and then gives them little or no information about the company that they are investing in. The prospectus doesn't tell you anything. The IPO is based on one fact only: all UAE IPOs are massively oversubscribed, hence people will buy this one too.

Since it is a new company which is still under formation what basis would they have to price their shares other than 1 dirham per share. The only other price they could have gone for would have been 10 dirhams a share which might have been too much.

I bet if you go out and ask 1000 people who are applying for Dana Gas if they know what the company will be using their money for at least 99% of them wouldn't. All they care about is that the share is a dirham and it will double or tripe or even quadrouple. That's all that matters to them. It's a shame that despite all it's progress, the UAE's capital markets are woefully under regulated. They are blessed with massive volumes, but insider trading is rampant, and these kinds of IPOs inwhich companies hoover off billions of investors' dirhams without ever telling what they want their money for are becoming more and more frequent.

4:52 PM  
Blogger waterboy said...

I don't think that this consists of the government giving money to the citizens - the IPOs are looking more and more to me like a stealth tax than a gift, in that they suck up private capital into state-controlled companies to be spent according to the desires of the ruling families.

I do wonder whether, when the bubble bursts, there will be calls for more shareholder democracy - i.e. accountability for the use of funds - but muscati is right: people are buying on a promise based on very flimsy foundations.

11:35 PM  

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