State of the IPO Market

Posted on November 15, 2011 at 10:11 PM

In the past few years, the Hong Kong Stock Exchange has emerged as a global IPO leader, dominating the market two years in a row. The scaled back pricing of a few large IPOs and investor nervousness have done little to seriously alter the financial world's shift to the Asian market. Likewise, the reclamation by the United States of the number one position in the IPO market, as recently pointed out by the Wall Street Journal, has not dampened foreign companies' appetite for listing in Asia. This interest is hardly one-sided, as Chinese companies are also increasingly attempt to list on American exchanges.

As for Hong Kong IPOs, Prada and Samsonite are just a few of the prominent Western companies that listed in Hong Kong this summer. Prada's offering, which was handled by Slaughter & May, was the biggest in Hong Kong this year and despite disappointment over scaled back prices and the initially modest .3% rise, the stock has gained 18.9% since its June debut.

The strategy behind Chinese debuts like Prada's is two-pronged - companies take advantage of an investor base flush with cash while also promoting their brand in a coveted market. Samsonite's CEO, Tim Parker, recently spoke about this trend when he explains that his intention was to, "orient the company where the world's center of gravity is going to be in the future." As a Managing Director at Morgan Stanley's global capital markets group in Hong Kong explains, it's natural for many Western companies to list in Hong Kong when they make 30-40% of their revenue in China. A dozen more non-Asian companies have plans to list in Hong Kong within the next few months, including British shoe maker Jimmy Choo and Greek jewelry designer and luxury goods retailer Folli Follie. High-end retailers in particular are focused on Hong Kong as the entry point into what McKinsey calls "the future of the luxury goods market."

In terms of outbound investment on the US stock exchanges, many US and UK law firms offer diversified platforms because their clients include foreign companies listing on the Asian exchanges and Asian companies listing on the U.S. exchanges. One market trend to take note of is the controversial reverse merger/takeover, or RTO, whereby a defunct but still publicly traded shell company in the U.S. is taken over by a Chinese operating company. The Chinese company then is able to list on a U.S. exchange without expending the funds and time that an IPO would have cost. The process is said to invite fraud because smaller Chinese companies, that can't meet their own domestic exchanges' profitability requirements, capitalize on general investor excitement over Chinese stocks. Some have been guilty of overstating their revenues to investors with a decreased ability to discern the truth and a decreased chance of reach the company's assets in China in case of liability.

In Hong Kong, these types of scandals are rare because these "backdoor listings" on the US stock exchanges are treated as new IPOs on the HKSE, as the Financial Times has noted. Approximately 350 Chinese companies are currently listed in the U.S. through reverse mergers. Reuters reports that the SEC is developing new policies to deal with these accounting scandals, including possible trading suspensions. Chinese regulators have been cooperating with the American regulators to perform inspections of these companies abroad and the trend does appear to be slowing down significantly. Also aiding the RTO slowdown, are the SME Board and the ChiNext Board of the Shenzhen Stock Exchange, which opened in 2004 and 2009, respectively. These two boards were established to provide public funding options for smaller-growth and emerging Chinese companies and are home to approximately 800 listed companies.

Meanwhile, the performance of legitimate Chinese companies listing in the U.S. has declined somewhat in recent months, in part because of investor nervousness over these RTO accounting scandals. There's also a tendency among buyers to get overexcited by Chinese stocks and then sell quickly when the stock doesn't immediately perform. Social networking site Renren, NetQin Mobile and Phoenix New Media were all victims to this quick pop and fizz phenomenon, rising an average of 21% on the first day of trading and then falling to 4% above the offering price a month later. Still, over 36 companies have debuted in the U.S. in the past year and the head of IPOs for China at Ernst & Young predicts another 30 before year's end.

The bilateral interchange taking place between Chinese companies debuting in Western exchanges and Western companies debuting in China has been termed a "love affair" but the more appropriate analogy seems to be a marriage. There is a serious commitment on both sides to keep interests intertwined and avenues open for future communication. The field is an exciting one for those that are eager to aid in building this relationship and work on both US and Chinese exchanges.

This growth is reflected in the expanding employment opportunities for capital markets attorneys in Asia with US, HK or, increasingly onshore IPO experience. Firms are seeking not just experienced partners and senior associates but also junior associates, in anticipation of continued development in their capital markets practices. Please feel free to contact us should you have any questions at (212)979-5900 or You can also visit our website at or to obtain more job and market information.

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