Wednesday, September 29, 2010

The Difference Between BID and ASK: Liberty Mutual

Liberty Mutual's announcements this month about the IPO of their Liberty Mutual Agency Corporation business, and then the subsequent postponing of that IPO illustrate a simple key concept that many people miss - the difference between BID and ASK.   

When you look up tickets for Justin Bieber on StubHub, for example, you see ASK prices - just because someone posts that they will sell tickets for $1500 each does not mean that someone will pay $1500 each.  $1500 is the ASKING price, and can be, in some ways, arbitrary.  The other essential part of the trade, of course, is what someone is willing to pay - the BID - and if there is a seller who is willing to meet the willing buyer at that price.

What does this have to do with Libery Mutual?  First, their announcement from two weeks ago:

"Liberty Mutual Agency Corporation, a unit of Liberty Mutual Holding, will seek to raise as much as $1.41 billion in what would be the biggest initial public offering in the United States so far in 2010, Bloomberg News reported.

The company, the second-largest writer of property and casualty insurance distributed through independent agencies in the United States,  plans to sell 64.3 million Class A shares at $18 to $20 each, according to a filing with the Securities and Exchange Commission. The proceeds would be used to reduce debt. Underwriters have the option to buy an additional 6.43 million shares if demand warrants, the filing showed."

See - that's an ASKING price.   That's how much Liberty Mutual wanted to get for their business.  But how much were the bids?  We don't know - we do know one thing - they were less than the asking price!  How do we know this?  From Liberty's announcement today that they were postponing the IPO:

"SAN FRANCISCO (MarketWatch) -- Liberty Mutual Group said Wednesday that it postponed a planned initial public offering of stock in Liberty Mutual Agency Corporation. The company said the "stalled" economic recovery, "volatile" stock market and undervalued property and casualty insurance stock prices create an "unfavorable" environment for receiving appropriate value for the business. "The delay will not impact our business or our day-to-day operations," Edmund Kelly, Liberty Mutual Group chief executive, said in a statement. "While we still believe this transaction is a useful step in giving the group additional capital flexibility, we have more than adequate capital to conduct our business successfully.""

You have to love the euphemisms Liberty used: "stalled economic recovery"  (in the last two weeks?  really? everything has changed?)  "volatile stock market" (it's up 2% from when they announced the IPO - with very little volatility) and "undervalued property casualty insurance stock prices."  

What Liberty is trying to tell you is that they were unable to sell the business for their asking price.  The rest is just smoke and mirrors.


disclosure: Liberty Mutual insures my house and car


Wynngolfhatguy said...

funny thing......Petro Bras was able to float a $67 Billion Secondary offering this week.

Just maybe those Citi & BAC investment bankers overpromised???

I'm sure you'll get your Liberty shares soon enough:-)

Kid Dynamite said...

Wynngolfhatguy: i just sent out a twitter article about the Petrobras thing - a must read:

might change your view of the state of the IPO market...

Wynngolfhatguy said...

Thanks for the article. Interesting....although I think most knew the shares were going to the Government in exchange for the oil reserves. That's why the stock has been under such pressure since Spring.

The IPO/Secondary market has actually been quite active the past 4 months (relative to the two years before).

The US Govt. sold $2.2 billion of their Citi Preferreds this week too.(I've never seen a Preferred move so fast)

My point is that capital markets are open. I am in complete argeement that Liberty simply wasn't ready to downsize their deal quite yet.

Daniel said...

One of the problems with the IPO market as opposed to the M&A market is that a lot of the smaller investment banks, Montgomery, H&Q etc are gone. Those were the guys that did all the little deals that GS and the bigger banks didn't want. I'm not saying that the Liberty deal is small or disagree that they couldn't sell it for what they wanted. I'm just saying that the there are many smaller companies that just can't get the attention of larger banks and that is a big reason for the decline in IPO's.