Warner Music Group’s sour initial public offering last week will not be joining the IPO hit parade, a victim of, more than anything, its own overhyped expectations.
Wall Streeters had been stupefied at the $22-$24 estimated offer price, a range analysts and investors called plum crazy. The $23 midpoint gave WMG — a standalone music company facing slumping sales and uncertain prospects — a higher multiple than giant Time Warner, Viacom or Walt Disney.
It’s not clear whether the inflated numbers were due to the underwriters (Goldman Sachs and Morgan Stanley) or WMG’s owners (Edgar Bronfman Jr., Providence Equity, Bain Capital and Thomas H. Lee Partners), or both.
One analyst blames the thicker walls separating banking from research — a byproduct of recent financial scandals. “A research analyst would say, ‘That’s crazy, your investment banker is blowing smoke up your ass.’ ”
But the bigger the deal, the fatter the underwriters’ fees — a fact that’s drawn some vitriol. Investor and market pundit James Cramer accused Goldman of veering from a policy of “long-term greed” in its desperation to make the quarter.
The WMG offering price was slashed to $17 the night before the IPO. Stock dipped below $16 on its first day of trading, accompanied by a flood of negative press. An initial range of, say, $16-$18 a share could have avoided that.
“Setting the price is an art, not a science,” notes analyst Steven Tuen of Gotham’s IPO Value Monitor.
Somebody needs art classes.