IPOs are not always a good thing

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IPOs are not always a good thing

Initial public offerings (IPOs) can be fantastic for a growing company. It creates a new flow of capital without having to take out loans, offering stock options to employees can increase company loyalty and productivity. But sometimes the thrill of a public offering may have been more than the company can handle.

“Companies sometimes forget that by going public, they are losing some control over their operations and bottom line,” explains Richard Cayne of Meyer International. “Once the IPO goes live, investors and ‘the Street’ determine whether the company is successful, whether they actually are or not. That can be ruinous. Both for the company and investors.”

When IPOs go wrong

Here are a few examples of IPOs that didn’t do so well:

Groupon: This online discounting site had one of the biggest IPOs with its stock gaining 50% in price on its first day (from around USD16 to USD26), but within a month, all those gains were lost. While there were some fluctuations in the first few months, missing revenue estimates and rumors of deals gone awry meant that Groupon lost investor confidence. It now trades under USD5 a share.

Vonage: Once the name in voiceover IP technology, Vonage decided to take the IPO route to raise funds to become more competitive. In what seemed like a populist move, they offered a large percentage of IPO to individuals directly, through an online portal. Not only did the portal fail, but so did the IPO, losing over 10% in one day. The individual investors who thought they didn’t complete their IPO purchase were told they had to pay USD17 for a stock worth less than USD15. And then it came to light that the large offering to individuals was done because there was a fear that institutional wouldn’t buy. There was a class action. It didn’t end well for Vonage.

Blackstone: For those who read the financial sections, they must have been amazed that one of the biggest private equity firms known for leveraged buy-outs was going public. It really wasn’t. Similar to other large companies (like Google), the company going IPO was a spin-off, worth only a portion of the parent company. But it still garnered a lot of attention and a lot of buying when it went public. Surprisingly (or maybe not), the financial markets fell, and so did the value of the stock. By half. The stock is now trading around its IPO price, but it took almost a decade to get there.

So, is there any point to investing?

Richard offers some comfort, “It is not all doom and gloom. We should look at failed IPOs as object lessons and be more careful when the next IPO comes around.”

For more information about IPO investing, feel free to contact Richard Cayne at Meyer International.

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