This time last week, Firmus Technologies was gearing up to launch the biggest ASX initial public offering (IPO) in 30 years.
On the back of the artificial intelligence (AI) boom and Space X‘s Nasdaq listing earlier this year, it was being sold as the biggest ASX listing in a generation. With little opportunity to invest in the local market, ASX tech enthusiasts faced a rare opportunity.
Firmus’ broker syndicate had told prospective investors that early indications of interest were well above the offer size. They said that more than half the raise would likely go to existing investors. This implied that there would be very little left for retail investors to participate. In other words, most would miss out.
By Thursday morning, the narrative began to swiftly change.
First came news of repricing. As institutional enthusiasm began to dwindle, it was revealed that the offer price had been reduced. Initially from $11 to $9, then $8.25. According to the Australian Financial Review, a figure as low as $6 was considered. This represented a nearly 50% decline from the starting offer price in less than 24 hours.
Not long after, Bloomberg News broke the news that the IPO had been cancelled. Several other news organisations quickly confirmed it.
The blame game then began. What would happen to Firmus now? How could things go so wrong so quickly?
Many echoed the sentiment of long-time Firmus backer David Paradice, Managing Director of Paradice Investment Management, who was puzzled as to how demand could evaporate so quickly.
According to the Australian Financial Review, he said:
We were told there were massive bids coming out of America, which clearly never eventuated. There was a big difference between what the underwriters were saying and the outcome.
At least two major groups of stakeholders will come off most bruised. Of course, the founders and existing investors who stood to book an enormous profit, should the IPO have gone ahead at $11. However, the broker syndicate will also have a lot to answer for. At the very least, there will be reputational damage and lost fees.
While plenty of stories will be written about the losers of the abandoned Firmus IPO, we should take a moment to mention the group of investors who have most certainly come out on top.
A victory for retail investors
When investing alongside insiders and institutional investors, retail investors often feel like they are at a disadvantage. Not just because they lack professional expertise, but also because they feel they have an information handicap.Â
In the case of IPOs, this is often magnified. The Firmus listing was no exception.Â
In fact, Ten Cap portfolio manager Jun Bei Liu described the Firmus IPO as “probably one of the most polarising IPOs [she has] ever seen”, and noted that “the lack of detail they disclose [was] unprecedented.”
Companies like Firmus, with little operating history, are difficult to value. Without adequate disclosure in other areas, it brings a whole other layer of challenge.
This makes it even harder for retail investors to decide whether to participate.Â
According to the Australian Financial Review, Firmus’ targeted valuation of $43.7 billion on FY26 and its operating revenue of around $70 million implied a price-to-revenue of around 860 times!
For context, SpaceX listed at a price-to-revenue multiple of 94 times, which was widely considered as lofty.
By pulling the IPO, retail investors were spared from having to value Firmus and decide whether it was worth the hype.Â
Saved from the winner’s curse
Behind this phenomenon is a theory known as the ‘winner’s curse’.
The winner’s curse suggests IPOs favour the well-connected with deep pockets.Â
In an underpriced IPO, institutional investors act on their advantage to take up a large allocation, pricing retail investors out.
When an IPO is overvalued, the opposite occurs. Institutional investors may bail after learning that it is overvalued. Retail investors then end up getting their full allocations. When the company lists, the valuation drops, and retail investors are left to watch their investment crater.
However, in Firmus’ case, this played out before it listed. Reports of an excessive valuation and a lack of interest were made public, leading to its cancellation. Retail investors were spared.
Retail investor JOMO (joy of missing out!)
Now that the IPO has been called off and the blame game has started, many will argue that Firmus’ IPO was always destined to fail. They will say they never would have invested.Â
However, hindsight is a powerful thing, and the Firmus hype was real. The float was backed by some very big players, including Nvidia, Blackstone, and some of the world’s biggest investment banks.
It’s likely that many retail investors would have been caught up in the euphoria and invested in the ‘biggest IPO in a generation’ at the earliest opportunity.
There are certainly lessons to be learnt.
However, for now, retail investors should take the win.
Should the ASX IPO have proceeded at the original price of $11, Firmus’ banking syndicate stood to earn fees of around $215 million.
Instead, Firmus was forced to abandon the IPO and will have a lot to answer for.Â
Retail investors walk away unscathed, free to allocate their capital to their next promising investment.
The post The real winners of the Firmus fiasco appeared first on The Motley Fool Australia.
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Motley Fool contributor Laura Stewart has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Blackstone and Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
