Life After London's Worst Ever IPO: What Deliveroo's Bungled Initial Public Offering Means For The Investing Landscape

It was supposed to be the IPO that galvanized the London Stock Exchange, but the listing of Deliveroo ROO in London’s biggest IPO for a decade quickly became a disaster - with the delivery giant’s stock value closing some 26% below its initial listing price on an opening day and wiping nearly £2 billion off of the company’s market capitalization. 

On the surface of things, Deliveroo’s stock market debut looked as though it should’ve been a comfortable success. The food delivery startup has been making waves across UK tech for many years and demand during the COVID-19 pandemic only strengthened the company’s fundamentals. This year, Deliveroo announced that it was expanding to 100 new domestic locations in a bid to accommodate demand. 

Amazon AMZN had even recently bought 16% of the company to further underline its confidence in the upcoming floatation. 

However, what transpired when Deliveroo finally went public was London’s worst ever major IPO debut this century at least, according to Dealogic data. One of the company’s backers claimed to the Financial Times that it was “the worst IPO in London’s history.” 

So why did investors turn their backs on a company that appeared to be moving in the right direction with Amazon among its most prestigious backers? And what does Deliveroo’s market performance mean for the ongoing IPO boom and its momentum? 

Factors Leading to Short-Term Failure

Deliveroo’s market performance or lack thereof seems strange at first glance when other rivals like DoorDash DASH soared 85% upon its New York Stock Exchange listing in 2020, but according to market commentators, there was a cocktail of factors that contributed to Deliveroo’s IPO flop. 

Factors like pricing, timing, uncertain business prospects in a congested marketplace, concerns over employee treatment and regulatory risks all came under scrutiny. 

It quickly became clear that plenty of the UK’s most prominent investors, including Aberdeen Standard, Aviva Investors, BMO Global, charity fund manager CCLA, Legal and General Investment Management, and M&G had refused to participate in Deliveroo’s IPO due to their questionable treatment of workers. 

Meanwhile, other investors had become fearful of the upcoming regulation of the gig economy, while company founder Will Shu’s decision to implement a dual-class share structure where his shares possess 20-times the voting power of other investors also created an off-putting effect around Deliveroo’s listing. 

(Image: Business of Apps)

As the chart above shows, Deliveroo can in no way be considered a market leader when it comes to UK takeaway delivery companies, and the market leader, JustEat TKWY has firmly established itself as top of the food chain, leaving Deliveroo with plenty of ground to make up. 

However, this doesn’t excuse Deliveroo’s poor performance in relation to DoorDash, a US delivery company that successfully ran an IPO in 2020. 

According to Alasdair Haynes, the CEO of Aquis Exchange AQX, “the initial price was just incorrect. The people with egg on their face here are the advisors.” 

Does Deliveroo’s Falling Share Price Represent Value to Investors? 

Could the rebuke of Deliveroo at the IPO stage mean that there may be a valuable investment to be had later down the line for investors? As we’re in the midst of an IPO boom, it may be the case that analysts simply overestimated the initial hype that the company would receive before the floatation found its natural level. 

At the time of writing, Deliveroo shares have been rebounding admirably towards some form of recovery for investors. 

When considering the company’s potential for growth with operations beyond the 12 nations it currently has a presence in, as well as Q1 results from 2021 showing 71 million orders placed accounting for the trade of £1.65 billion, it represents 130% growth on the year before. 

While accounting for businesses to pick up during periods of lockdown, it’s clear that 2021 will represent a year of significant growth for Deliveroo as it expands operations across the UK. 

Although there are some severe issues to overcome in terms of regulation, the gig economy, and the treatment of employees, the fact that Deliveroo is currently trading for a price well below what the analysts recommended just a month ago and is bound for significant growth may be too tempting a prospect for investors.

Lessons For The IPO Market

Although it may not come as much use to Deliveroo, the takeaway giant’s bungled IPO has served as a lesson for other companies reading themselves for a floatation. According to recent reports, a security software company, Darktrace, is slashing the pricing of its debut in a bid to avoid the same fate as Deliveroo - lowering its expected IPO price from £3.6 billion to between £1.6bn and £2.7bn. 

It appears as though new companies coming to market have become wary of overvaluations following the company’s much-publicized shortcomings. While some experts have claimed that the Deliveroo IPO may have served to unnerve investors, it may in fact be a timely reminder to other companies to value their listings responsibly. 

While the world is in the midst of an unprecedented IPO craze, it’s worth both companies and investors alike spending more time researching the market climate and making well-thought-out decisions on how to progress. 

Maxim Manturov, Head of Investment Research at Freedom Finance Europe claims that “one should pay attention to how the company's earnings rise and its potential TAM. It is also advisable to explore the company's products and what needs they cover, the company's financial condition, and liquidity. A healthy debt-to-assets ratio, renowned IPO underwriters, and suggested ways to use the raised funds are also worth paying attention to.”

(Image: Seeking Alpha)

As the chart above shows, IPO proceeds are continuing to ramp up at a mind-boggling pace, and with this in mind, it’s never been more important to study the initial public offerings you’re enticed by before parting with your money. 2021 is set to be a year of great new opportunities to investors, but only the most patient and responsible traders among us will profit from the chaotic financial landscape.