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Wednesday, 25 May 2016

That did (not) happen

IPO exuberance ensnares Deutsche, Wells Fargo

IPO exuberance has ensnared Deutsche Bank and Wells Fargo. The two banks nixed a biotech deal last week - six days after it started trading. Their reasoning looks defensible, but their due diligence beforehand less so.

By rights, Vascular Biogenics is not the kind of company that would get a shot at an IPO in a typical year. The Israeli firm has just 32 employees, loses money and its specialty of gene therapy is promising, but rife with disappointment.

But the stock market is on fire this year. There were some 70 percent more IPOs in the first half of this year compared to 2013, according to Thomson Reuters. And 70 life sciences companies have come to market to date. Understandably, Wall Street rivals want as much of the action as they can get.

What appears to have helped Vascular get this far is the strong backing of existing investors, who pledged to buy 2.9 million of the 5.4 million shares on offer. That’s a strong endorsement of its prospects.

One “substantial existing U.S. shareholder” did not pony up, though, says Vascular. That, according to people familiar with the situation, is Jide Zeitlin, the company’s biggest backer, who promised to buy 2.4 million new shares. Zeitlin told the Wall Street Journal he wouldn’t comment beyond saying “we have extended ourselves and made every effort to support VBL.”

In any event, neither he nor the other insiders are contractually obligated to make good on their pledge. Those who bought the stock because of such insider support would have cause for feeling hoodwinked – and for fearing a huge amount of stock would then have to be dumped on the market, sending the price plummeting.

Deutsche and Wells reckon the last-minute pullout constitutes a material misrepresentation of the facts in the prospectus, which warrants killing the deal.

They’re probably right. Their due diligence beforehand, though, smacks of top-of-the-market laxity. They relied on the word of insiders to get a deal done for a shaky-looking company, to get their hands on a juicy 7 percent IPO fee.

Zeitlin has a bit of an odd past. He pulled his nomination for a U.S. post at the United Nations after an article in the Washington Post about his troubled investments and a lawsuit for impersonating the chief executive of a rival company in an email. He claimed it was a poor joke and the suit was dropped.

It’s the kind of information that ought to be a red flag to underwriters, who do have contractual obligations to stick with a deal. They can count themselves lucky they found a way out.

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Deutsche Bank and Wells Fargo have unwound the initial public offering of Vascular Biogenics, a week after the company started trading. The Israeli biotech company went public on July 30. On Aug. 8, the two banks canceled their underwriting agreement with the company. As a result, no shares will be issued, and all trades canceled.

The underwriters canceled their agreement because an existing investor in the company who had agreed to buy a large chunk of the stock did not pay. That amounted to the IPO prospectus now containing a material misstatement. That allowed the banks to walk away from the deal, according to a person familiar with the banks’ way of thinking.

The company offered 5.4 million shares at $12 each. Existing investors had agreed to buy 2.9 million of them.

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