Good morning my dear readers,

Happy 2024 my friends. Important year ahead. Let's make it count.

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Today, as usual, we will keep it brief but I have an unique perspective for you to think over.

Demerger Valuations Vs IPO Valuations.

First, IPO Valuations.

The merchant bankers and the promoters of a company sit with the big investors and get a sense of what the market is likely to pay for their upcoming ipo.

It is an almost PERFECT way to extract TOP VALUATIONS.

The promoters want the highest possible valuation and aim to make their company look as sexy as possible for the potential investors.

*The merchant bankers ofcourse prefer the IPO to come at slightly lower valuation so that the investors make 'some' money in the IPO and invest in the merchant banker's next IPO too.

Basically, in most IPOs, the valuations are as high as they can be.

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Now, Demerger Valuations..

No such activities 'to fix valuations' like I mentioned above take place during a demerger, which also is a fresh listing, in a way.

Instead, shares of the Spin off are distributed directly to the parent company shareholders, whether they like it or not and the pricing is left to market forces.

Now imagine, there is a conglomerate which has a market leading 'consumer business' and most of the country's largest 'Consumer Funds' are investors.

And then suddenly the Consumer Conglomerate spins off one of the completely unrelated, smaller divisions, which is totally NOT SEXY and too small.

What do you think these 'Consumer Funds' would do when they are forced to own shares of an unrelated, small division?

Well, most often than not, they begin to offload the demerged shares.

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Now compare both the approaches..

In IPOs, we have to pay high valuations, set by promoters and bankers.

In Spin offs, we are buying from forced sellers.

*Not saying that we cannot make money in IPOs, we sure can. And we can still make losses in Spin offs too if our eventual thesis is only wrong. I am talking about the 'averages'.

**I invest in IPOs too, by the way. But I just wanted to highlight the difference between these two so you can ponder over it.

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Pretty interesting thought to start 2024.

See you next Friday. Stay Safe. Enjoy the beautiful weather, finally Mumbai has cooled down, especially at nights. Got to enjoy the cool air while it lasts =)

My Best,

Neil Bahal

Founder

Negen Capital

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