`Stabilisation' sounds alert for investors

Stabilisation. That word is rarely used by private investors. But anyone thinking of buying shares in a newly floated company (IPO) should sit up and ponder the implications of stabilisation. Last Thursday Merrill Lynch International issued a short statement. In it, that US-based international financial services group said it was the stabilising manager in the UK in connection with the global offering of 70 million shares in iTouch, the mobile information company which is 50 per cent controlled by Independent News & Media.

It further stated that stabilisation transactions may occur from 9.30 a.m. on August 2nd (the day of the listing) until September 1st.

Preliminary reports on the first day's trading on the London Stock Exchange showed a high of 75p sterling, or a 5p premium on the issued price, and 71.5p at the close. That suggested that the issue was a success - albeit by a whisker - as the shares had ended up with a small premium.

However, a closer look at all the first day's dealings is revealing. First, there were two small deals at 68p and one at 69p, or 1p to 2p below the IPO price. Second, and more importantly, there were two substantial deals - the first one at 11.45 a.m. involved 6 million shares at 70p, and the other involved a block of 5.9 million shares at 70p.

The 6 million is thought to have been an institutional investor, but the 5.9 million, and others, could have been stabilisation deals. Regrettably, share purchases under these arrangements are not revealed but if these were associated with stabilisation, then they could have had a substantial impact on the price. On the first day's trading some 18 million shares, or over 25 per cent of the shares issued, were traded. And the 5.9 million deal alone would have accounted for a whopping one third of the issue.

Stabilisation is, in effect, a legalised form of share price manipulation. It did not exist in this State until a section was included in the 1999 Companies (Amendment) Act, just prior to the launch of Eircom. While stabilisation was not required for Eircom, because the initial share price was well above the issued price, the joint global co-ordinators - Merrill Lynch International and AIB Capital Markets - had wide powers without the need for disclosure.

Tucked away in page 164 of the prospectus was a section which said the co-ordinators could "effect share transactions which stabilise or maintain the market price of ordinary shares or ADSs at a level which might not otherwise prevail in the open market. Such transactions may be effected on the Irish Stock Exchange, the London Stock Exchange or the NYSE, or otherwise".

It then went on to say that the maximum price at which stabilising transaction can take place was the offer price and that the co-ordinators "do not intend to disclose publicly the extent of any stabilising transactions or the extent of any long or short positions".

Such statements are in keeping with the legal requirements but they are a blow to transparency. Why should such deals, and price, not be disclosed?

Advocators of stabilisation could argue that such powers are necessary to avoid wide gyrations in the initial share price, and that they are, in effect, a form of underwriting. And those who pushed the Irish legislation through could argue that they were only following the established practices in other modern economies.

However, we should not follow practices that are not transparent. Stabilisation can distort the underlying share price. It is quite clear, therefore, that it can be quite wrong to draw conclusions on the success/failure of an issue which is under the process of a stabilisation exercise. The iTouch share price fell to 68p on Friday, or 2p below the issue price, but it is not known if Merrill Lynch was in the market then.

For iTouch to succeed it will have to prove that it can compete with major groups such as Vodafone and Vivendi which are co-developing Vizzave, a mobile portal, which has received a substantial investment of €200 million. And a judgement on the performance of its share price will have to wait until after September 1st when the stabilisation process is finished, and when the normal supply and demand pressures come into play.