MF Global’s IPO

Well, they got the job done, if not particularly elegantly. Man Group, the UK hedge fund business, has long planned to separate its brokerage arm. Thursday’s flotation of 80 per cent of MF Global in New York, though, was a distinctly qualified success. The price, $30 per share, was well below the $36 bottom end of the range. Midway through their first day of trading, almost a third of MF’s shares had changed hands and they had dropped 8 per cent.

Two obvious questions arise. Does MF’s stock deserve a hammering? And why did Man decide to push the button regardless? MF is largely a victim of the very thing that
ought to underpin its valuation: volatility. As a big derivatives broker, choppy markets ought to push more volume MF’s way. Evidently, fears over subprime contagion have hit US financials in general. Even if it was no hedge fund itself, therefore, the new kid on the block was never likely to escape the general sell-off.

MF’s original price range was also ambitious. At the upper end, $39, the implied 2007 price/earnings multiple of 30 times put MF’s rating closer to that of futures exchanges. MF faces a more competitive environment than the latter. At $30, MF’s p/e multiple was a more realistic 23, at a slight discount to its broker-dealer peers.

As for Man, strategic benefits of separation outweighed the disappointment at not taking even more money off the table: its own shares barely moved on Thursday. That Man decided to press ahead anyway, when even a short delay might have extracted more value, raises a wider question about the IPO market. Several other recent financial flotations, such as Blackstone’s, have proved disappointing. Was Man’s thinking driven, at least in part, by the fear that if it was not done now, things might have been worse down the line?