Does Renren IPO spell double bubble trouble?

This FT story highlights two key problems, one, the possibility that a bubble in social networking is crossing with a bubble in Chinese offerings leading to a perfect storm in the capital markets, and two, the possibility that we are seeing the impact of weaker underwriting standards on the New York Stock Exchange now that the NYSE is a publicly traded company and is motivated to chase volume rather than quality listings.

Readers may recall the Facebook flap some months ago. An attempt by Goldman Sachs to lead a 1.5 billion dollar private placement to US investors ran into trouble when the valuation on the deal ($50 bn) and other glowing data about the company (600 million users!) found its way into the wider press. The problem with such leaks is that they are not balanced by risk factors that give investors a full picture of what is going on at the company.

The Renren IPO indicates a new problem as the FT story indicates: there is pressure on Facebook competitors to match the numbers that Facebook is allegedly putting on the board. That is reminiscent of the pressure that Worldcom put on the telecom sector a decade ago. ATT and Sprint racked their brains – and their workforce – to make the same profit margins as their competitor not realizing the Worldcom numbers were phoney. Of course, no one is suggesting there is funny business going on at Facebook but no outsiders really have a full picture of what is going on at the company either.

Combine that with the pressure on the New York Stock Exchange to weaken its historically strong diligence standards in order to attract listings now that it is a public company itself, and you have a formula that can lead to trouble.

Oh, and of course, there is the China problem: there is no genuine corporate governance or transparency in China even at companies listed on the NYSE.

None of this means Renren won’t make money for shareholders but the offering would seem to be off to a problematic start.

FT.com / Media – Renren’s valuation for IPO questioned.