Tuesday, 29 January 2008

The DP World Fiasco

It was a proud moment in the financial history of the UAE, finally an equity market of international standards right at our doorstep. A market that would allow us to forget the sorry state of the other two stock exchanges with their minimal transparency and corporate governance, heralding the dawn of a new era. Alas, it was a moment that came and went faster than we envisioned. Since launching in September 2005 the Dubai International Financial Exchange has managed to attract an impressive grand total of one lonely local primary listing and according to reports that too took some arm twisting[1]. And while the Dubai International Financial Center has been celebrating three years of success in attracting 7,000 professionals and 500 financial institutions[2] by inviting international popera singers, the DIFX has been eerily quiet about celebrating its achievement. DIFX usually detracts any serious questioning of its failure by referring to the fact that at $10Billion[3], it hosts the largest value of sukuks in the world although there is no mention of trading volumes.

The Spaghetti Junction

Consider a hypothetical scenario where the New York based Securities and Exchange Commission’s authority (or for the sake of argument, DIFC Authority) establishes an investment company, similar to DIFC Investments, that buys a significant stake, say $2Billion worth[4] in an international investment bank (say Deutsche Bank) that it regulates. That bank is then mandated to lead manage a sister company’s IPO (DP World) that will ultimately list on the very exchange that the authority regulates (as in DIFX). Confusing? In addition to that Mr. Henry Azzam, the regional CEO of the international investment bank which won the mandate served until June 2007[5] as the chairman of the exchange that the company that it is mandating will list on. But that is just a hypothetical scenario; surely a recently established authority that was built on international standards will not accept such a paradoxical paradigm, especially after it has been shaken to its core since it abruptly fired two senior staff members who assisted in founding the center after serious allegations by both of them that touched on corporate governance and transparency. Had that happened in the USA, Europe or India it would have resulted in an uproar, but not in the UAE, all we had was deafening silence. Interestingly, Deutsche Bank was also DP World’s advisor in acquiring P&O as well as offloading it thereby scoring a double whammy for the German bank[6].

The means justifies the ends?

Not really. In the world of finance, the means is just as important as the end if not more so. Regardless of the conundrum of the above spaghetti junction the IPO of DPW was hailed as a success, raising a whopping $5 Billion for a 23 percent stake in the firm[7]. The city was abuzz; finally a world-class IPO that will bring the DIFX out from its sluggish state and turn it into a serious player on a regional scale. There was even talk that the DPW listing will do for DIFX what Emaar’s listing has done for Dubai Financial Market[8]. At 15 times over subscription[9] the end was a roaring success, the means however was anything but. DP World shares allocation angered as many investors as it satisfied. Even in the discreet and excessively complimentary atmosphere of the GCC many investors could not hold back their sentiments. In a curious move DP World prevented half the lead managers from allocating 40 percent of the shares that were reserved for regional investors. Although the prospectus didn’t differentiate between the regional and international lead managers DP World decided that those lead managers based abroad, Deutsche Bank and Merryll Lynch, would only receive allocations for international subscribers and that if regional subscribers wanted to invest they would need to approach the two Dubai head quartered institutions, Shuaa and Millenium Finance. Because this fact was not properly highlighted in the brochure hundreds of millions of dollars from regional investors ended up being placed in the wrong category that not even lead managers knew existed[10] and received zero allocation. The shares subsequently fell by 5 percent wiping off over $1Billion from the company’s value as investors protests grew louder with allegations of lack of transparency surfacing[11] and warnings that the confusion would dampen interest from regional investors in future IPOs on the DIFX[12]. Ironically a few days after the listing one of the lead managers reported that interest from regional investors is gathering pace and that "overseas institutions seem to be selling at any levels” which was behind the substantial decline in the price as well as the thin trading volumes.[13] In retrospect, perhaps DP World could have been more welcoming to regional investors in the first place?

Postscript: In the spirit of transparency this writer would like to state that his investment company received 0.1 percent shares allocation.

[1] http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/29/ccdubai129.xml

[2] http://www.zawya.com/story.cfm/sidZAWYA20071128073118

[3] http://www.zawya.com/story.cfm/sidZAWYA20070618113605

[4] http://www.zawya.com/story.cfm/sidZAWYA20070612033405

[5] http://www.ameinfo.com/124975.html

[6] http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/07/10/cnpno10.xml

[7] http://www.zawya.com/story.cfm/sidZW20071121000116

[8] http://www.zawya.com/story.cfm/sidFFT107295B956D256

[9] http://www.zawya.com/story.cfm/sidZAWYA20071121142632

[10] http://www.zawya.com/story.cfm/sidZW20071122000096

[11] http://www.zawya.com/story.cfm/sidZW20071127000126

[12] http://www.zawya.com/story.cfm/sidZW20071122000096

[13] http://www.zawya.com/Story.cfm/sidZW20071129000027

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