MStar's Taiwan IPO attracts strong international interest

MStar Semiconductor on Friday priced its initial public offering close to the top end of the price range to raise NT$8.4 billion ($281 million) ahead of a listing in Taipei on Christmas Eve. The deal was well-received and broke new ground as the first Taiwan IPO to target international investors with a roadshow to both London and the US, in addition to Taipei, Hong Kong and Singapore, and to use an international-style bookbuilding process to determine the final price.

MStar, an integrated circuit design house that is particularly strong in the LCD monitor space, was also the first company to mandate an international bank as a bookrunner. The job went to Goldman Sachs, which acted as a joint bookrunner for the offering together with domestic brokerage firm Capital Securities. In reality though, the deal was pretty much split between the two with Goldman arranging international distribution and Capital Securities handling the retail offering and the sale to domestic institutions. According to sources, Morgan Stanley and UBS also bid for the historical mandate.

The sources said that even though MStar decided to list in Taipei, as opposed to in the US or Hong Kong, it was keen to involve international investors in order to achieve a better price. Analysts note that Taiwan IPOs are often deliberately priced at a cheap valuation to facilitate a rally in the secondary market. The practice is quite accepted as a way for brokerages to make money on the trades, as fees are often capped at the minimum NT$12 million (about $400,000). To compensate for the poor fees, the underwriters typically keep a portion of the deal on their own books with the aim of selling it at a profit in the aftermarket.

So far, MStar’s bold move appears to have worked as the deal was priced in line with where its larger competitor Mediatek is trading, suggesting the newcomer didn’t even have to offer an IPO discount to get its shares away. MStar’s share were also quoted at around NT$350 in the over-the-counter grey market following the pricing, suggesting a potential 16.7% increase versus the IPO price of NT$300. That would be a strong, but not excessive, gain if it were to be repeated on the first day of trading on Friday.

MStar also attracted good demand from international investors with close to 160 international accounts in the order book at the end of the seven-day roadshow. The institutional tranche, which made up 70% of the deal after a full clawback in favour of Taiwan retail investors, was more than 10 times covered and about 90% of that demand came from international investors, according to a source. The international accounts were scaled back a bit during the allocation, however, and in the end, about 60% of the institutional tranche – or 40% of the total deal – was placed outside Taiwan.

Asian investors and global accounts based in Asia accounted for about 60% of the demand, while 25% of the order amount came from the US and 15% from Europe. The deal was open to international investors with their own ID trading account in Taiwan, although those without their own account could also buy the shares on swap with banks or brokerages that were not involved in the IPO. However, nine out of 10 of the buyers were said to have had their own accounts.

Retail investors subscribed to 102 times as many shares as had been earmarked for them, which triggered a full clawback that increased the retail tranche to 30% from 10%. The full clawback required a subscription ratio of more than 100 times.

MStar offered 28 million new shares at a price between NT$250 and NT$310 and fixed the price at NT$300 for a 2011 price-to-earnings multiple of 16.8. While equal to Mediatek, the price implies a slight discount to global peers like Qualcomm and Broadcom, which trade at 19 and 18 times next year’s earnings respectively.

The base deal accounted for just 6.1% of the existing share capital although with some of the pre-IPO shareholders eligible to count towards the public float, MStar will have a freefloat of about 20% at the time of listing. The deal also includes a 15% greenshoe option, although that is comprised entirely of secondary shares. The sellers will include the founders, the management, employees and pre-IPO investors, although specifics haven’t been disclosed. Other pre-IPO investors are said to include Taiwan venture capital firm CID, Temasek Holdings, and the Government of Singapore Investment Corp (GIC).

Contrary to Hong Hong, where the bookrunners have 30 days to exercise the greeshoe, in Taiwan they have only five days. After that, the 7% daily limit on share price gains or losses take effect meaning there will be little need to use the shoe to stabilise the price.

While small by international standards, the $281 million IPO is still the largest in Taiwan this year, according to Bloomberg data. And if the 15% greenshoe is also exercised in full, the total size will increase to $323 million.