Why Analysts Are Calling IPO Process a Game of “Liar's Poker."

  • Jan 21, 2019 AEDT
  • Team Kalkine
Why Analysts Are Calling IPO Process a Game of “Liar's Poker.

Investment Banks play a major role in the process of Initial Public Offering (IPO). While acting as a broker between the company and the investors, these investment banks generally try to present a better picture of the company in front of investors. They exaggerate the company’s achievements to show as a good investment for the investors. On the other hand, investors try to contain their excitement and show less interest in the Investment Banks’ offer in anticipation of lesser prices. It takes a lot of convincing and negotiations between both Investment banks and investors to finalize the IPO price and terms. And largely, it is dependent on the selling ability of the investment banks. To make a good offer, Investment banks deal with the investors who are bluffing by showing less interest, and at the same time, Investment Banks have to convince them that the deal that they are offering is profitable and there is an existing demand for it.

Analysts call this scenario as the game of "Liar's Poker" in which both investors and Investment banks are bluffing at each other to get a better deal. Liar's Poker is non-fiction, a semi-autobiographical book authored by Mr. Michael Lewis which was first published in 1989. The book contains the author’s experiences as a bond salesman on Wall Street, and it captures an important period in the history of Wall Street. The book is about a story of a group of traders and salesmen who made money by selling bad investment products of Salomon Brothers. According to the book, Salomon Brother knew that the investment products were bad for the Buyers, but they went ahead with it to get them off Salomon's books.

The game of Liar's Poker plays an important part in the IPO Process as many times prices and term of IPO are determined on the basis of the situation between the investment bank and the investors. In the book, Liar's Poker Michael Lewis has said: “A man who can tell a good story can make a good living as a broker” and this line pretty much explains the job of the investment bank in the IPO process. Investors can draw down the prices in the IPO offer by underplaying their interest for the IPO offer, and it is the job of the investment banks to make them believe that if they don’t go for the deal/offer now, they may miss the train.

The bluffing between the investors and Investments banks further goes to the time of the allocation of shares. At the time of the allocation of shares, usually, investors get fewer shares in allocation as compared to what they actually bid for. Due to this reason, investors generally bid higher in anticipation of getting a satisfactory number of shares at the time of allocation. The allocation of shares is highly dependent on the demand of the shares. If the demand for the shares is high, an investor can expect to receive a smaller number of shares in allocation. At the same time, if investors receive the same number of shares what he actually asked for, means that the demand was low for the IPO.


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