Like any job, investment banking has its low moments. But few things are more demoralising and achingly painful than to pull an offering.
Imagine spending years pitching for a mandate and months preparing a company for an initial public offering: arguing with lawyers over the prospectus, hosting countless investor meetings, managing the client’s expectations on pricing and timetable, putting together innumerable presentation decks on the equity story, and overseeing a syndicate of underwriting banks. Sure, no one is getting out of a Higgins boat on Omaha Beach, but these deals feel like ordeals.
And then, when it’s finally showtime, you can’t get the deal over the finish line. Orders trickle in, the deal stalls and then goes into freefall. Investors bail out, and you have to tell the client, and eventually the market, that the IPO is not going to happen. The humiliation is public.
Reading Bloomberg’s account of the collapse of the $5.5bn Australian IPO of Firmus Grid brought back unpleasant memories. The listing aimed to value the Nvidia-backed data centre business at about $30bn. But investors balked at the valuation, and when the deal started to founder, even those who had placed orders began withdrawing them:
[B]y Wednesday, headlines were popping up in phone alerts about weak demand and a potential price cut . . . That afternoon turned into an endless evening as investors tried to figure out what was really going on with the deal….
Fund managers seeking updates were left hanging; some shrank their orders while others pulled them completely upon sensing the IPO was in trouble.
Postponement became inevitable, adding to a wave of failed high-profile listings, including Bamboo Insurance, Holtec and Oura in the US.
Every equity capital markets banker has experienced something like this. I don’t exaggerate when I say it is literally a sickening experience. The offering has no momentum, and as you reach the end, the orders you do have start to be withdrawn, turning a challenging situation into an irretrievable one. You feel helpless and powerless as the order book melts like an ice cube in the heat.
You can call an IPO failure an occupational hazard, but that’s scant consolation when it happens to you.
Sometimes a listing gets withdrawn because the market has fallen sharply between launch and pricing. This famously happened when Goldman Sachs postponed its own IPO in 1998 due to market volatility amid the Asian financial crisis. There is little reason for shame in such circumstances: you’re frustrated, but thinking about how to keep investors warm so that you can relaunch when markets recover.
More often, the problem lies elsewhere. The company and its shareholders want a valuation that fund managers are not prepared to pay. Before formally launching an offer, banks sound out investors through processes variously known as “testing the waters”, “pilot-fishing” and “early looks”. The aim is to gauge the price at which the shares will attract demand and avoid launching at a valuation at odds with investor appetite.
But sometimes the message doesn’t get through. Perhaps the banks tell the client what investors think, and the client doesn’t listen. Or perhaps competitive pressure leads the lead banks to present an over-optimistic picture, for fear of being criticised for lowballing the offering. As I discussed recently in MainFT, banks face pressure to pitch high valuations to win mandates, and clients dislike having those valuations “re-traded” downwards later.
The Bloomberg account suggests a slightly different dynamic. Investors were roughly okay with the original valuation being discussed, but pushed back when Firmus sought a valuation of about $30bn after announcing a deal with Meta.
Many investors were nevertheless comfortable with a valuation around $25 billion. But a few days before the IPO price was set, Firmus announced an agreement with Meta Platforms Inc . . .
It revised its numbers on the back of that announcement leading to the IPO price.
Some investors saw that as the company pushing the envelope. They were being asked to value a company that had $51 million in revenue in the 2026 financial year at over $30 billion, based on ambitious growth targets that would require it to spend billions of dollars it didn’t yet have.
One of the central tenets of equity capital markets catechism is that the bottom of the price range should act as a “hook”: a price so compelling that putting in an order is a no-brainer. By building an oversubscribed book of quality demand early, bankers can then use momentum to push the price higher within the range.
That’s the theory at least. Unfortunately, clients don’t always see it that way. They worry that the bottom of the range will become the final price, leaving the company and its insiders short-changed. They may think the banks are trying to make their own jobs easier rather than straining every sinew to maximise the valuation.
Clients also sometimes suspect that fund managers are “gaming” them with their valuation feedback, projecting an M&A mentality on to a dispersed group of investors with plenty of other listed companies to buy. It’s painful to write this, but clients often don’t trust their banks to look after their interests.
Once a deal gets into trouble, it can be difficult to salvage. Options narrow quickly. In the US, repricing below the marketed range or downsizing the offer can sometimes rescue an offering. In other markets, repricing below the range is less common, and a transaction that cannot price within it may simply fall apart.
Whatever the reasons for misjudging the price range, the lesson is clear: there is little point soliciting investor feedback if you are going to disregard it.
The aftermath leaves a bad taste in everyone’s mouth. Lawyers and auditors have run up huge bills that still need to be paid. The engagement letter may require the client to reimburse the banks’ expenses, but recovering them can be extraordinarily painful. An angry client may demand that the banks absorb some, or even all, of the costs.
An IPO also consumes enormous amounts of management time and attention, sometimes to the detriment of the business. Employees who worked on the listing, or anticipated a windfall from publicly traded shares, may be demoralised. A company can pivot to private financing, but the public markets may have left it damaged goods. The bankers, meanwhile, may find that the client no longer wants their shadow darkening the entrance of the company’s headquarters.
One consolation is that investors have short attention spans. Markets recover, companies beat expectations, and investors find new reasons to buy into lofty valuations. A pulled IPO is a soul-destroying setback, but not an irretrievable defeat.
For the banker, a postponement like Firmus feels like a punch to the gut. As for prospective issuers and their shareholders, the moral of the story is that public markets don’t spoof. An IPO book-build is not a negotiation. If you don’t like what investors are telling you in pre-marketing, don’t expect them to come to the table when you launch the offering.