Sharks circle as First Active floats in risky waters

Plenty has been said and written about the First Active flotation and the eventual pricing which was a long way short of the range indicated a few weeks ago.

Some believe that the First Active management and its bevy of advisers in Davy and ABN-Amro have made the best they could of an appalling market. Some believe that they were right to go ahead with the flotation but made a hames of it, while the other camp believe that First Active should have bitten the bullet and aborted the flotation when it became clear that institutional investors would only get involved if they got their shares at a knockdown price.

Whether one accepts or rejects the argument that First Active should have stayed as a building society and offered cheaper mortgages and higher deposit rates than free shares, the pricing of this flotation is all wrong. It has all the hallmarks of a company so keen to go public that it was willing to offer shares to institutional investors - already stuffed to the gills with Irish financial shares - at a knockdown price.

Whatever the company might say, a first-day premium of 25 per cent is excessive and is the clearest possible indication that the 225p flotation price was too low. Who was responsible for First Active pricing its shares at 225p? Not the unfortunate members who sold their free shares into the flotation and were short-changed, but institutional investors who drove the hardest of bargains and have made a killing on shares that they really did not need to buy to satisfy any investment strategy.

Close on half the Irish stock market is made up of financial shares with the big two of AIB and Bank of Ireland alone accounting for 37 per cent of the market. Add Hibernian, Anglo Irish, FBD, Irish Life and Irish Permanent and institutional investors already have a disproportionately wide range of investment opportunities to give themselves the exposure they want to Irish financial markets. Whether it is personal banking, corporate banking or the mortgage market, does the market really need another financial share?

Quite simply, the institutional investors that First Active deemed so important to the flotation were in a buyer's market when it came to taking up shares. Secure in the knowledge that First Active apparently needed them on the share register more than they needed First Active shares, they drove the hardest of bargains.

Forget the statements about the institutional element of this flotation being three times oversubscribed. At such a knockdown price the only surprise is that the level of over-subscription from the institutions was not greater. A 25 per cent gain on one investment like First Active is a nice return when markets are heading south and an even nicer investment if some British or continental buyer takes a 9.9 per cent stake as Abbey National did with Irish Permanent shortly after the IP flotation.

October 1998 was the worst possible time to float any company on the stock market and recruitment group Parc took the correct action when it pulled its flotation. On a vastly different scale, the decision by Goldman Sachs to pull its flotation should have been a good enough reason for others to think twice about going to the market.

First Active deputy managing director, Mr Tony Shanahan, was quoted in the Financial Times: "We decided the advantages of proceeding with the flotation outweighed the disadvantages. . . We could not have restarted the process until the second quarter of next year at the earliest and that would have entailed enormous delays and costs."

The second quarter of next year? There is a reasonable chance that equity markets will have regained some ground by then and that this week's piffling 225p price would have risen to a more appropriate level. The costs of producing brand new documentation (First Active would by then be in a new financial year) would no doubt be expensive but if it meant that shareholders would have got a better price, then it is a cost worth bearing. Too late now.

Then there is the fundamental question - did the former First National need to demutualise at all? The management has repeatedly said the new bank needs access to mainstream financing for its planned expansion. But this argument is, to say the least, unconvincing unless First Active is planning to go aggressively on the expansion trail.

The management's record on acquisitions as a building society does not suggest that an aggressive acquisition programme is in the pipeline. All that the former First National Building Society has done in the past has been to buy some mortgage businesses in Britain and has arguably paid over the odds in the process. Does their record suggest that they have the ability to do any better as a plc?

After all, in the three years since Irish Permanent went public, there is little in the area of acquisitions that the IP has done that it could not have done as a building society - buying Prudential Life for around £30 million and Guinness & Mahon for £12 million. Not exactly earth-shattering diversification by the IP.

Much has also been made of the paper gains that First Active directors stood to gain from share options and the fact that the lower the flotation price the more valuable those options would be. Should these options have been awarded at the time of the flotation or would it have been more advisable to award the options some time after the flotation?

The option scheme may have accorded with all the guidelines from the Irish Association of Investment Managers, but to eliminate any possible charges of conflict of interest, it might have been better for the directors to have waived their rights to options for some period - be it six months or a year - after the flotation.