IPO Mania Collapses in Germany

Market top indicator: crash of Germany’s most hyped IPOs Zalando, Rocket Internet

There has been a series of debacles on the German IPO market, including Chinese companies that listed there. But Zalando is a precursor of a different kind. It’s the largest German online shoe and fashion retailer. It’s known for its no-holds-barred marketing. It’s one of the stars of the vibrant Berlin startup scene. It’s going to change the world. Founded 6 years ago, it went public on Wednesday with enormous hoopla, hype, and hope.

The front of the stock-exchange building in Frankfurt was decorated in the style of a Zalando box. Ten mannequins lined the entrance to the building. Inside, before trading started, six models strutted Zalando’s stuff, circling once around the trading floor where Zalando managers, bankers, traders, and journalists jostled for position. This IPO was a big event.

Instead of just ringing the bell amidst a round of wild applause, the way it is done traditionally and shown on TV around the country, board members Robert Gentz (CEO and cofounder), David Schneider (cofounder), and Ruby Knight took the bell out of a signature Zalando box and then rang it. It was a fabulous PR stunt: showing that branded box on TV to millions of people, for free, under these glorious circumstances.

So it’s just a retailer with thin margins in an ultra-competitive industry with no barriers to entry and a lot of big established players whose key markets are in the possibly toughest retail environment in the world – the Eurozone which can’t seem to get out of its long-term recession. And its largest market, Germany, is famous for its dreary retail sales (here’s my chart for annual retail sales 1995 – 2013; it may be better to avert your eyes).

The IPO price was €21.50, but in unofficial trading, the shares changed hands at a premium of up to 30% in anticipation of the fireworks during regular trading. This baby was hot. For the first official transaction, the price jumped 12% to $24.10, which gave the company a valuation of nearly €6 billion, more than Lufthansa’s €5.5 billion. History was being made. The sounds of wealth being transferred were thrilling….

But it didn’t last long. During the first hour, the price dropped to €21.55. The lead investment banks of the deal where busy mopping up shares, trying to keep them from falling below the IPO price. And they succeeded. The stock closed at the IPO price. That was Wednesday.

On Thursday, the bottom fell out. With the DAX down 2%, the stock plunged 11.6% and closed at €19. And that’s where it will be stewing over the weekend because the hard-working Germans get to take this Friday off (“Day of German Unity,” the anniversary of Reunification in 1990).

Thursday was also the day when, after deafening hype and huge amounts of hope, Germany’s largest tech IPO in a decade started trading. Rocket Internet’s shares had soared in unofficial trading to above the IPO price of €42.50, which was already at the top end of its IPO price range. It gave the company a valuation of nearly €7 billion – €1 billion more than Zalando’s and €1.5 billion more than Lufthansa’s.

Anticipation was enormous. It’s Germany’s Alibaba. It wants to become the largest internet platform outside the US and China. It was the paragon of the Berlin startup scene. People were already getting rich off it. It was inspiring.

Demand for the IPO sizzled. The company sold 37.9 million shares, plus an overallotment of 4.9 million shares. The issue was 10 times oversubscribed. It raised €1.6 billion. That’s a lot of cash to play with!

So the company doesn’t exactly have a stellar business model. It creates e-commerce startups that imitate the big success stories out there, such as Amazon, eBay or new kids on the blocks like Airbnb, and it places them in emerging markets, hoping that this would work out somehow, someday. It launches about 10 of these outfits a year.

But Latin America, Asia, and Africa are not exactly places where money grows on trees, though there might be less competition and hopefully higher margins than in the US, Europe, or China. So none of its companies is making money. But hey, airlines can burn through a lot of cash in a hurry too (before they go bankrupt). And on Thursday, its first day of trading, the stock plunged 13%.

A lot of investor money evaporated in those hours. But it could have been worse: the lead investment banks that did the deal – among them Berenberg Bank, JPMorgan, and Morgan Stanley – were apparently buying the shares to stabilize them and keep them going into freefall.

“Our firm isn’t interested in the first price,” CEO and founder Oliver Samwer said in an interview on N-TV after the debacle, though before the debacle, driving up the stock price from its IPO price had clearly been priority number 2, after extracting as much money as possible from investors, which was priority number 1 – debacle, that is, for investors who’d bought the shares at the IPO price or earlier in the day, and not for the company which picked up a big pile of much needed cash to burn. “We’re oriented for the long run,” Samwer explained.

Clearly, market participants hadn’t read the instruction manual on Wall Street hype and how they have to close their eyes and hold their noses and buy, buy, buy regardless of the realities that money-losing companies face and regardless of valuations that are impossible to explain to a rational mind. There’s always the hope that on Monday, the fate of German IPOs will turn around on a dime, but those two super-hyped stars-turned-into-flops could also mean that the IPO window is closing, and that stocks overall have entered rough waters.

German consumers are supposed to save the Eurozone – and by extension the global economy – but economic expectations “completely collapsed” last month and now dropped again. Read…. Russia Sanctions, Whiff of Reality Sink ‘Economic Expectations’ in Germany

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  7 comments for “IPO Mania Collapses in Germany

  1. NY Geezer
    Oct 3, 2014 at 12:41 pm

    By now, the public in every country knows that IPOs are a scam to get the public’s good money for very over valued stock.

    The Scam only works if there are enough people who believe they understand the dynamics of the scam sufficiently to ride the pump up before the dump down. Perhaps too many people have found themselves on the wrong side of the con.

  2. Dead at 18, buried at 65
    Oct 3, 2014 at 12:52 pm

    Wolf.
    You are spot on again in pointing out the mirage of institutional “Pump and Dump” schemes, which are: – devoid of reality, and absent from real price discovery;

    I knew Facebook was going to be the largest pump and dump scheme in the history of the world. -I should have shorted the living daylights out of it! Then you had companies like Morgan Stanley come in and rescue the stock before it crashed and burned to zero!

    I am not suggesting that Zalando has no merit, but I am dismayed by companies like this one, who clearly demonstrate a complete ignorance of the global recession which is pervading our economies right now, in order to capitalise on the ambition of greed.

    • Oct 4, 2014 at 4:03 pm

      I hope I’m not starting to sound like a broken record ;-)

  3. HD
    Oct 3, 2014 at 10:10 pm

    It’ probably hard to imagine right now, but there will come a day that money (in whatever form it will present itself by then), will become genuinely scarce, as in almost entirely made of Unobtainium. It’ll be a bit like a Greek wondering: “Gee, two years ago I still had at life, I earned a paycheck, if I wanted to go buy something, I went out and bought it, simple as that. What was I thinking, because now I’m living on the street and there’s no way to get my old life back?”

    People will look back at these IPO’s and wonder: “What were they thinking? What were we thinking?”

    Sometimes a little imagination, combined with a healthy mix of pragmatism and anticipation is in order. Best way to avoid the steamroller.

  4. Oct 11, 2014 at 8:45 am

    Page after page of bone crushing enlightenment. It’s true that being a Wolf Richter devotee I’ve missed out on some swaggering market parties, but my investment money is still in my bank account and not in some CEO’s offshore account. I’ll bide my time until the day P/E is no longer considered passé.

    • Oct 11, 2014 at 12:25 pm

      Bob,

      I didn’t become a stock market bear until earlier this year…. though I’ve been lambasting the Fed and other central banks for inflating and distorting financial markets – and in a way, destroying them.

      I did however start calling out the credit bubble in 2012, called it the “greatest credit bubble in history” in 2013, called out Housing Bubble 2 in early 2013 (saying that it would inflate further with all sorts of negative consequences)….

      Since the fall of 2013, I started to point out issues in housing bubble 2 (declining sales, for example). And then, in the spring of 2014, I started calling attention to the stock bubble’s parallels with other bubbles (1999/2000 and 2007/8) in their pre-crash state. That’s when my writings turned bearish on stocks.

      However, I’m not a perma bear. There will be opportunities to buy. But I’m too old to pick up some left-behind bucks in front of a steamroller. That’s for younger people to try to do.

      I’m bullish on natural gas, and have been in my writings since April 2012. It has about doubled since then. I might become bullish on corn in the near future, and I’ll keep my eyes on it. I can’t figure out what oil will do, so I’m staying away from it; there is a sense of panic, but I’m not sure it’s enough panic yet.

      Bonds with long maturities, junk bonds, many bond funds, leveraged loan funds, etc. are in a folder labeled “potentially toxic.”

      In this current environment where most assets are overpriced, I’m happy making a near-risk free 1-2% a year with much of my investments – rather than accepting the now significant risk of losing 20% or even 50%. I let stocks go where they might. Wherever they’re going, I’m happy for them to go there without me. They’ll be on sale same day, and then he who still has the liquidity to buy wins.

      • Oct 11, 2014 at 1:22 pm

        At 74 and counting, I’m in the markets for fun. I own CLF and did own CHK but sold it. I’ve been short on ten stocks now for two years, paying the dividends instead of collecting, but I never buy on margin so I’m privileged to be able to wait it out. In my opinion, what these Central Banks have done borders on treason.

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