IPO prospectuses: the long and longer of it


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Given the sky-high valuations achieved by market newbies, it is fitting that their prospectuses achieve equally ridiculous bulk. US-listed ride-hailing apps Didi and Uber both bombarded would-be investors with about 400 pages of information. Paytm, listing in India, this month bested the duo with a 500-page “red herring”, as preliminary prospectuses are known.

This is massive page inflation. Microsoft, going public in 1986, said all it needed to in 50 pages. A couple of decades later Google weighed in at 230.

Perhaps life was simply easier back then. Bill Gates reportedly appointed Goldman Sachs to steer Microsoft’s initial public offering on the basis that they did not spill their food and “seemed like nice guys”.

Microsoft was also profitable and cheap, more than can be said for much of the current crop of debutantes. Despite being priced higher than Gates wanted, shares were valued at 5.5 times trailing revenues. This is one-quarter the price tag secured by survey software maker Qualtrics (250-page prospectus) 35 years later.

There is little correlation between a prospectus’s girth and market capitalisation. In Europe, the document for a sub-€150m company is on average only a third shorter than those valued at €1bn-plus, says Oxera, a consultancy. Nor does it correlate with an extended spell as a private business: Microsoft spent just as long time in private hands as many of today’s debutantes.

Chart of length of prospectus documents in terms of number of pages, by country. It shows that the median length of Italian prospectuses is over 800 pages

Regulations, including provisions under Sarbanes-Oxley, only partly explain the verbosity. Likewise complexity. Some of the fodder in today’s prospectuses is kindergarten-simple. Pictures and flow charts padded out Meituan Dianping’s 700 pages.

For investors, more is not necessarily better. Boilerplate risk statements are so broad and lengthy as to be pointless. Alibaba’s blockbuster IPO was accompanied by many warnings of the legal grey area inhabited by its variable interest entity structure — as was every subsequent Chinese offering. Yet shockwaves over such structures are once again reverberating.

Column chart of Average number of words in filings showing The age of verbosity

Investors bleating at Didi Chuxing’s admittedly steep regulatory roadblocks perhaps struggled to get past page 3, where the company warns: “Our business is subject to numerous legal and regulatory risks that could have an adverse impact on our business and future prospects.”

Standardisation discourages scrutiny. Companies have followed Google’s lead in displaying their civic stripes but have added new, often unhelpful, metrics. Total addressable markets is a case in point. Deliveroo claims a TAM 1,000 times the size of its actual 2020 revenues. Time to cut prospectuses — and fantasy metrics — down to size.

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