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14 October 2014

The IPO Bubble Can Burst 

Europe’s stock markets received a wake-up call in the first week of October — but paradoxically, good news may lie in the poor performance of two high-profile IPOs.

In Germany, shares of incubator firm Rocket Internet dropped by 27% following its IPO at the beginning of October before recovering somewhat in the aftermath. Then online apparel store Zalando saw its shares plunge more than 20% following its public trading debut before rebounding.

Investors had high hopes for these tech start-ups, but they came to market in an environment of greater volatility than normal because of investor anxiety about everything from Ebola to slowing growth across the eurozone. The surge in volatility prompted underwriters to pull the IPO for Spie, a French engineering services firm that hoped to raise up to €1.2 billion.

However, the IPO market is not a proxy for the economy as a whole, and its investors are prone to veer between wild optimism and extreme despondency. The cool response to these ‘hot’ IPOs recalled the ups and downs of dotcom mania in the late 1990s, when Deutsche Börse launched the Neuer Markt, a trading platform dedicated to tech stocks. By 2003, the platform was shut down because so many of its companies had gone out of business.

The number of European IPOs more than doubled in the first nine months this year over the same period in 2013, but investors remain far more cautious today than they were at the height of the boom.

The positive underlying message is that the market’s irrational exuberance is not unlimited – and investors may still retain some lessons from the dotcom bust more than a decade ago.