Baker Street, London -- Are you feeling comfortable? Have you posted your Freeserve application and checked your rising portfolio on the net? Good. Just two little things to tell you then before you start your afternoon's work. First, did you know that corporate bond defaults in the US, the powerhouse of the world economy, are rising sharply and look set to reach a nine-year high? Both Moody's and Standard & Poor's, the two leading credit agencies, say that credit quality is reaching its lowest for a decade. Elsewhere, noted economist J.K. Galbraith was quoted as saying that the US market is now more of a bubble than it was in the sixties. Despite all these worries the market only fell 27 points in the morning; so carry on.
Reed (LSE: REED), which has been out of favour for a long time, was the FTSE 100's best performer this morning with a gain of 30.25p to 485.5p. The gain came after news that the company had appointed Crispin Davis as Chief Executive. He joins from Aegis Group. The shares have fallen from a peak of 629p to a low of 423p just this year. Even after their modest recovery they still yield 3.6% and have an historic price earnings ratio (P/E) of only 14.
In the wider market Scoot.com(LSE: SCO) enjoyed a good gain of 6.5p to 46p on the back of the free publicity towards Internet companies generated by the Freeserve issue, and the announcement of large stakes by major institutions.
Information group Reuters(LSE: RTR) rose 9p to 924p after announcing interim results. Revenue for the 6 months to end June was up 8% to £1,562m and profit before tax was up 2% to £300m. Earning per share rose 8% to 14.3p, or 16.2p excluding goodwill. The company said trading conditions were more difficult in the first half, particularly in currency markets. The abolition of a dozen currencies in Europe clearly didn't help.
Metal basher Invensys (LSE: ISYS) continues its charge with another gain of 3.35p to 330.5p. There was no news, but the stock seems to be coming back into favour with institutions after a long time in the corporate doghouse.
Banks were under pressure after the government announced plans to investigate the mortgage market. In the last year UK base rates have fallen from 7.5% to 5%: a fall of 33%. However, over the same period the standard variable rate mortgage has gone from 8.5% to 6.85%, a fall of only 19%. Lloyds Bank(LSE: LLOY) lost 14p to 830p and National Westminster(LSE: NWB) fell 29p to 1307p at the thought of their juicy mortgage margins being trimmed.
Cable company Telewest(LSE: TWT) shed 10.5p to 283p on fears that is has been sidelined by the deal between NTL and Cable and Wireless Communications(LSE: CWZ) which fell 22p to 705p.
More tales of woe were heard from the retailing sector when Debenhams (LSE: DEB) announced that like-for-like sales fell 3.6% in the first 18 weeks of trading this year. The shares fell 9p to 394p.
British American Tobacco (LSE: BATS) fell 31p to 540p. It was announced that it would receive only 3.8 ringgits a share for the Malaysian Tobacco Bhd that it is selling to Rothmans. This is 28% below yesterday's price before trading was halted.
Yesterday the book-builders for the Old Mutual(LSE: OML) issue announced that had exercised their "greenshoe". More weird language you might think, and you would be right. This doesn't mean they went jogging in day-glo trainers, but it does mean they sold an extra 176.2m shares. How come?
Read on, Fool, and be educated.
Most new issues include an over-allotment option, known colloquially as a "greenshoe", that allows the issuer to sell up to 15% more shares than planned. During the book-building process brokers traipse around institutions selling the company and taking orders for the deal. At the end of each presentation there is a little ritual charade. The client always asks how the deal is going. Needless to say the broker always responds by saying that demand is huge and that some big, but unspecified, names have already said they want half the deal and so on. Finally, the broker tells the client that if he really wants some stock to put in a bigger order so that if he gets scaled back he will at least get some stock. And of course, as a favoured client, the broker promises to look after him anyway. Most importantly though, the broker tells the client whatever he does not to give his order to the other scoundrels in the deal.
Of course the client knows the broker is lying and the broker knows the client knows he is lying. But that is the way of dealers the world over. Naturally, the company being sold hasn't a clue what is going on because its senior management has been giving the same presentation 6 times a day for 2 weeks in 4 continents and doesn't know if it is breakfast time or supper time.
To get a feel for the how the deal is going, the institutions will talk to other brokers and, perhaps, other institutions as well. Naturally, they lie to him and he lies to them as nobody wants to show their true hand. In this way the deal evolves and a consensus emerges as to whether it will be good or not. If it is a truly hot issue the institution will not want to be short-changed so he talks it down. If, on the other hand, it is rubbish and flops on day one he won't want the stock at all. Nevertheless, if it is a big FTSE 100 issue he will have to have some weighting in his index funds anyway. Finally, he calls his broker and asks for what he wants, plus 10 or 15% just in case he gets scaled back.
When book building is complete the lead manager will know exactly how much demand there is and how much stock he has to sell. Now comes the interesting part. If the deal is oversubscribed the broker can screw the co-managers and give them virtually no stock, but give his clients as much as he can. However, if demand is poor then he can stuff as much stock into the co-lead and sub-underwriters as he can and minimise the pain for his clients.
Normally though demand is greater than supply so all clients have to be cut back. But the broker has actually sold 115% of the issue, i.e. more shares than he really has. So he can give the institutions a bit more and keep everyone happy. The real test comes when trading starts. If the price is good and the institutions keep the stock then the broker can go to the corporate being sold and ask for the over-allotment option, or "greenshoe", to be exercised. This is good because the broker gets more fees and the corporate gets more money, and the institutions keep all their shares.
However, if the issue is doing poorly, and shares are dumped on the market, the broker can buy in the oversold 15% and keep the price firm. Hopefully the price will pick up later and the shares can eventually be sold. In the worst case, if the shares don't go up and he can't sell them, the broker simply closes his short position by the stock he has purchased. As a result the shares stay at a high price and nobody knows if the issue has been a success or not until the deal has closed and everyone has their money.
It's just like double booking airline seats or hotel rooms really -- standard business practice.
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