View from City Road: Beware first-day premiums

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Henry Cooke Lumsden, like the Bourbon family, appears to have forgotten nothing and learned nothing from experience. Less than six months after watching shares in Tadpole Technology almost double within two days of dealings starting - and rise more than fivefold within two months - its latest hi-tech offering, Division, closed at 97p yesterday, more than double its 40p flotation price.

Mispricing on this scale occurred even though 70 per cent of the shares were placed with institutions. Such an arrangement should have given the broker ample opportunity to sound out larger investors about an appropriate price.

Henry Cooke blames the market makers. Under Stock Exchange rules, dealers have to be allocated some stock. In both instances they needed little encouragement to mark prices up after the flotation to ensure a healthy profit for themelves. But even market makers are unlikely to mark up prices arbitrarily. In truth, Division is just a symptom of the market's taste for new issues.

Over-subscriptions have been at levels not seen since the late 1980s. Large first-day premiums have been given to mundane bus companies as well as the glamorous hi-tech Tadpole and Division.

That is partly because institutional investors are becoming more interested in smaller companies, believing they will be among the first to benefit from economic recovery. The Hoare Govett Smaller Companies Index has increased by 18.5 per cent this year while the FT-SE 100 Index has simply marked time.

But another reason for such keenness is that relatively few shares - and often none at all in new issues under pounds 30m - are available to the public. A small increase in interest among amateur punters can produce large levels of over-subscription.

There are signs that the buoyancy of the market is producing a flood of new issues from companies that have been starved of the opportunity for more than three years.

So far, 12 new issues have been completed, raising pounds 500m - or less than pounds 50m each. But at least as many have already been trailed and some observers estimate that there are at least 40 more bubbling under.

As more and more companies jump on the bandwagon, there is a risk that quality will deteriorate while prices demanded by entrepreneurs will rise. Investors should not be blinded by first-day premiums. They are not guaranteed.