Renren Busted IPO... From Fen-phen to Redrum (RENN)

Renren Inc. (NYSE: RENN) was one where being cautious almost looked and felt silly going into the IPO.  After all, it was supposed to be “The Facebook of China” and anything tied to social networking was supposed to be hot. 

The problem is that the company previously overstated its growth rates in its prospectus.  Then, to add insult to injury, the head of its audit committee resigned.  These were two huge red flags (no pun for China) in this IPO.  Still, investors wanted these shares no matter what.  We even gave the name for Renren’s IPO pricing as “Issues Be Damned!” but the shares still were massively higher after its shares began trading.

Now we have a situation where “China IPO” is tarnished.  Look at Renren now… Shares hit $14.00 this morning, which is now exactly where the Renren pricing went out.  The offering was some 53.1 million ADSs at $14.00 per share.  The stock’s IPO-date opening price was listed as $19.50 and the official post-IPO high was $24.00.  Then shares closed at $18.01 versus a low of the day of $18.00.  Sadly, that means that anyone who bought shares in the secondary market and decided that they wanted to own a piece of “The Facebook of China” got crushed. 

Then you can throw some irritants on your cuts by seeing how poorly this one has done.  Shares closed down each day since the IPO… $16.87, $16.80, $16.03, and then ultimately at $14.75 just yesterday.

Now we have shares after more than 40 minutes down another 6% at $13.85 and the new trading low is listed as $13.61 today.  That implies that Renren has become a busted-IPO.

It would seem on the surface that $14.00 would be a point of interest for retail investors.  This is the price that they can buy at the same price as the major institutions that actually received shares in the IPO.  The original price range was actually lower in a range of $9.00 to $11.00 that was then raised to $12.00 to $14.00. It sure looks now like the pricing was greedy and that the IPO-investor demand was greedy.

Whether or not $14.00 can hold up depends upon many factors that are outside of any American’s control.  Chinese ADS IPOs have suddenly lost their demand.  Investors are having a very hard time dealing with all of the fake companies that have come public in the reverse mergers of 2010.  It is also difficult for American investors to know what the REAL accounting ledgers say in China.

Trust is often hard to come by.  Trust in China is becoming even harder to come by, all over again.  Investors should have not been so greedy here by thinking that “The Facebook of China” was exactly what they thought it was.  The investment bankers and Renren itself should have not been so greedy here either.  Sorry, but an overstated growth rate and a key resignation immediately before an initial public offering should be a red flag to anyone. 

The caution, implications, and even the liability could ultimately go deeper in concerns here.  It is possible that the New York Stock Exchange should have requested more data before allowing a company to come public just because it was supposed to be hot.  A correction on growth ahead of an IPO and then a resignation of the head of an audit committee right before an IPO… Isn’t the NYSE supposed to have tougher listing standards for initial public offerings?  The scenario sounded more like an OTC-listed stock rather than an NYSE-listed stock.

Now that it is put that way, Renren might have been very similar to the mortgage crisis. Greedy sellers (mortgage lenders) met greedy buyers (borrowers).  We left out the term ‘liars’ here, but you get it.  Renren founder Joseph Chen is still the majority shareholder after this IPO. 

Maybe the worst has past now that the formal IPO price has been hit.  Maybe not.  Again, there are just too many factors and there are too few known endings.  So far Renren is looking like Fen-phen.  Let’s just hope it does not become the Danny Torrence’s line ‘Redrum’ from “The Shining.”

There is still some time before all of the underwriters get to initiate their analyst research coverage with “Buy” and with “Outperform” ratings with much higher price targets on Renren.  Those analysts are supposed to be behind a Chinese Wall (again, no pun intended) from the investment banking departments.  You can choose whether or not you want to believe how true that is.

The next time you see a “Hot IPO” where the growth rates represented in the IPO roadshow were ‘mistakenly higher’ and then you see a member of the audit committee resign, will you go ahead and trust things merely based upon “China” and a catch-all name reference? 

As we have always maintained… Understand what you are investing in.

JON C. OGG