Deliveroo's share price sunk 26% on its first day of dealing in London on Wednesday. It marked the worst first day performance of an IPO in the City for at least a decade. The slump has left tens of thousands of retail investors who backed the business facing steep paper losses.
The debacle has led to questions about how the raft of bluechip bankers behind the deal got it so wrong. Goldman Sachs (GS) and JP Morgan (JPM) were the lead book runners on the deal, while Bank of America (BAC), Citigroup (C), Numis (NUM.L), and Jefferies (JEF) worked as junior partners on the float. Deliveroo's founder and chief executive, William Shu, is also a former investment banker.
With such a roster of talent, how did the most anticipated IPO of the year turn into the worst float of the decade?
"The share price slide this morning raises inevitable questions about what went wrong," Sophie Lund-Yates, a senior equities analyst at Hargreaves Lansdown, said on Wednesday. "The syndicate behind this IPO is going to face criticism about the valuation they placed on Deliveroo."
A book runners job is to speak to a client — in this case Deliveroo — about how much they think their company should be worth. They then talk to big institutional investors to find out what they would be willing to pay. Thereafter follows a delicate negotiation between the two sides to try and find a price both parties would be happy with.
"Bankers in these situations need to manage the expectations of the client – Roo and Mr Shu – and that is not easy," said Russ Mould, investment director at stockbroker AJ Bell.
"I speak from experience during my times as investment analyst at UBS investment bank – there’s never a ‘right’ answer when it comes to balancing the needs of the buyers and the after-market with the requirements and hopes of the vendor."
WATCH: Deliveroo IPO flops on London stock market debut
IPO pricing is a "grey art," according to Micheal Ingram, a City of London veteran and former chief strategist at stockbroker WH Ireland. The precise means of reaching the final price is opaque but when done right it should leave the client feeling they got a good deal and see shares rise a little on the first day of trading, which gives IPO investors a warm feeling too.
Banks charge IPO fees as a percentage of the funds raised by the company going public. A higher share price generally means more money can be raised, which in turn means bigger fees for banks. That incentivises them to get the highest share price possible for a firm.
In Deliveroo's case, the widespread view is that banks lent too much towards the client's view and went with an unrealistically high valuation.
"It’s clear that the deal was badly mismanaged and much of the responsibility will lie with the book runners," Ingram said. "Often the problem is that there are too many people around the table saying what they think everyone else wants to hear, rather than what they need to hear."
Even if bankers tried to sugar coat the view of the City, it was hard for Deliveroo to ignore the widespread scepticism. Institutional investors were clear from the start that they had problems. In a highly unusual move, Aviva (AV.L), Aberdeen Standard Life (SLA.L), L&G (LGEN.L), and M&G (MNG.L) all publicly stated they would not take part in Deliveroo's IPO due to concerns over its treatment of drivers and governance.
"There was clearly something of a stand off between the big institutional buying base and the company," said Alex Harvey, a portfolio manager at Momentum Global Investment Management.
"In terms of the investment opportunity, note that Deliveroo has a lot of competition. It is not to food delivery what Netflix is to streaming."
A lack of investor appetite forced bankers to lower the share price range ahead of the float. Shares were eventually priced at the very bottom of the range. Even that failed to avoid the first day slump.
Lund-Yates said investors had fundamental concerns about the valuation, which priced in a lot of future growth.
"Conditions are unlikely to get any better than they are now for a delivery company," she said. "If that’s the case, the valuation created by a £3.90 share price is simply too steep to justify."
"They failed to address why Roo was valued at £3bn ($4bn) in November, £5bn in January and £8bn+ in March, other than to point at DoorDash, whose shares have cratered since the initial surge," said Mould.
The day of the float didn't help. March 31 marked the end of the quarter, a time when money managers are rebalancing their portfolios and preparing quarterly performance data. Most are unwilling to take large new positions.
Those close to the IPO process are relaxed about the first day performance. A broader shift away from tech stocks, coupled with a rocky IPO market globally, may have explained much of the slump. Sources close to the deal believe hedge fund shorting was also partly to blame, although there is scepticism of this theory in many corners of the City.
"We think it will bounce back," said one person close to the deal.
That is likely to be cold comfort for the legions of retail investor who put millions of pound into the company. Most in the City still believe the bankers got it wrong.
"It could have been priced a lot more realistically, which might have made a difference to the overall outcome," said Michael Hewson, chief market analyst at CMC Markets.
Goldman Sachs, JP Morgan, Bank of America, and Jefferies declined to comment.