Questioning why the DP World IPO was managed the way it was.
It was a proud moment in the ﬁnancial history of the UAE; ﬁnally, an equity market of international standards right at our doorstep. Since launching in September 2005, the Dubai International Financial Exchange has managed to attract an impressive grand total of one lonely local primary listing, and, according to reports, that too took some arm twisting. And while the Dubai International Financial Centre has been celebrating three years of success in attracting 7,000 professionals and 500 ﬁnancial institutions by inviting international opera singers, the DIFX has been eerily quiet about celebrating its achievements. The DIFX usually detracts any serious questioning of its performance by referring to the fact that at US$10 billion, it hosts the largest value of sukuks in the world, although there is no mention of trading volumes.
The Spaghetti Junction
I also want to draw attention to a hypothetical scenario that I have considered where the New York-based Securities and Exchange Commission’s authority (or, for the sake of argument, the DIFC Authority) establishes an investment company, similar to DIFC Investments, that buys a signiﬁcant stake, say US$2 billion, in an international investment bank (say Deutsche Bank) that it regulates. That bank is then mandated to lead manage a sister company’s IPO (say DP World) that will ultimately list on the very exchange that the authority regulates (say DIFX). It gets a bit confusing, doesn’t it? In addition to that, the regional CEO of the international investment bank, which won the mandate, served until recently as the chairman of the exchange that the company that it is mandating will list on. But that is just a hypothetical scenario; surely a recently established authority that was built on international standards will not accept such a paradoxical paradigm. If that happened in the US, Europe or India, it would have resulted in uproar. Will anyone question such a practice in the UAE? Interestingly, Deutsche Bank was also DP World’s advisor in acquiring P&O as well as ofﬂoading it, thereby scoring a double whammy for the German bank.
The means justiﬁes the ends?
Not really. In the world of ﬁnance, the means is just as important as the ends, if not more so. Regardless of the conundrum of this so-called spaghetti junction, the IPO of DPW was hailed as a success, raising a whopping US$5 billion for a 23 per cent stake in the ﬁrm. The city was abuzz; ﬁnally, a world-class IPO that will bring the DIFX out of its sluggish state and turn it into a serious player on a regional scale. There was even talk that the DPW listing will do for DIFX what Emaar’s listing has done for Dubai Financial Market. At 15 times oversubscription, the end was a roaring success. The means, however, was anything but.
DP World shares allocation angered as many investors as it satisﬁed. Even in the discreet and excessively complimentary atmosphere of the GCC, many investors could not hold back their sentiments. In a curious move, DP World prevented half the lead managers from allocating 40 per cent of the shares that were reserved for regional investors. Although the prospectus didn’t differentiate between the regional and international lead managers, DP
World decided that those lead managers based abroad, Deutsche Bank and Merrill Lynch, would only receive allocations for international subscribers and that if regional subscribers wanted to invest, they would need to approach the two Dubai headquartered institutions, Shuaa and Millenium Finance.
Because this fact was not properly highlighted, hundreds of millions of dollars from regional investors ended up in a category that not even lead managers knew existed and therefore received zero allocation. Upon listing, the shares fell ﬁve per cent at one time, while investors’ protests grew louder, allegations of lack of transparency kept surfacing and warnings were issued that the confusion might dampen interest from regional investors in future IPOs on the DIFX.
Ironically, a few days after the listing, one of the lead managers reported that interest from regional investors was gathering pace and that “overseas institutions seem to be selling at any level”, which was the reason for the substantial decline in the price, as well as the thin trading volumes. In retrospect, perhaps DP World could have been more accommodating to regional investors in the ﬁrst place. Perhaps that moment of pride in UAE ﬁnancial history has to wait for another day.
Postscript: In the spirit of transparency, this writer would like to state that his investment company received 0.1 per cent shares allocation.
This article was originally published in MONEYworks on January 2008.