The ARM IPO and Market Implications

The recent initial public offering (IPO) of ARM is a positive sign for the market and a welcome opportunity for Wall Street to get back to its deal-making roots after a challenging period for capital raising.

The Importance of Strong Demand

The strong demand for the ARM IPO indicates that investors are willing to take more risks. This boost in "animal spirits" not only benefits the valuation and momentum of ARM's stocks but also has positive implications for the overall market. A continuous stream of new IPOs provides investors with fresh ideas to compare and consider.

Lean Times for Traditional IPOs

Traditional IPOs have seen lean times recently, with global IPO volume declining by 5% in the first half of 2023. Consequently, the proceeds raised from these deals have dropped by 36%. During this period, there were 615 IPO deals, indicating a projected total of around 1,230 deals for the year.

This figure represents a decline from the 1,400 global IPOs in 2022 and the 2,436 IPOs in 2021. The current year appears particularly weak when compared to the pandemic-affected year of 2020, which concluded with 1,452 deals.

Cautious Investor Sentiments

Investors are feeling cautious due to the combination of a slowing economy and rising interest rates. Low deal volume not only affects stock performance but also has negative implications for bankers and banking associates, who are the backbone of Wall Street.

Showcasing IPOs: The New York Lunch Presentation

Nicholas Colas, the co-founder of DataTrek Research, shared an interesting anecdote about showcasing IPOs. He talked about a banker he worked with during his time at First Boston/Credit Suisse who was renowned for his showmanship during such deals.

One of this banker's favorite tricks involved the New York lunch presentation, a crucial event for marketing an IPO. These presentations served as a rite of passage for many analysts on both sides of Wall Street, with IPO lunches also being held in Boston and San Francisco.

By analyzing the ARM IPO and its market implications, we can understand the significance of strong demand for IPOs and the challenges faced by traditional IPOs in recent times. Despite cautious investor sentiments, IPOs continue to play a vital role in providing fresh investment opportunities and driving market momentum.

Lunches as Investment Events

The lunches organized by companies are not simply mealtime gatherings in luxurious hotels. They serve as platforms where management presents their business plans and receives questions from potential investors. These events are crucial for investors to gain valuable insights and develop a sophisticated understanding of new investment opportunities. Management plays a significant role in providing that initial investment "edge."

Having attended numerous IPO roadshows, it is intriguing that participants are explicitly instructed not to retain the investment slide deck. The reasoning behind this directive is unclear, as the Securities and Exchange Commission has chosen not to elaborate. However, speculation suggests that taking the presentation back to the office may offer attendees an unfair advantage. In reality, these slide decks merely resemble typical investor presentations with an attached deal term sheet.

Intriguingly, an astute strategy employed by investment managers includes intentionally setting up tables for a smaller number of guests than initially expected. By doing so, they successfully create the illusion of a highly sought-after opportunity. This clever tactic has consistently yielded positive results.

From my perspective, there is nothing inherently wrong with this approach. Salespeople sell, and it's the responsibility of buyers to exercise caution. Aspiring investment analysts can learn a valuable lesson from this: refrain from taking slide decks and ensure to arrive early.

Regarding AMR, it is poised to be a lucrative investment opportunity. As a leading company in chip design, it promises substantial growth potential. Moreover, only 9% of its stock is available for purchase, which amounts to approximately $5 billion. Given these factors, bankers like Colas should have no difficulty finding strong demand for AMR's stock without resorting to such tactics. For instance, Rivian Automotive (RIVN) raised a staggering $12 billion in November 2021.

According to news from The Wall Street Journal, ARM is aiming for a valuation of $50 billion. This valuation is determined by a combination of company fundamentals and the aggregated demand for its stock, partially generated through roadshow lunches.