IPOs Part II

As I mentioned in my previous post, taking a company public is a huge risk. As such, IPOs don’t happen cheaply, or overnight. A company risks a number of potentially bad scenarios, including not finding enough interested institutional investors, having a listing request denied, or not raising enough money to make the process worthwhile – all of which reflects poorly on the company’s financials moving forward. However, if a company is able to successfully tiptoe around that minefield, they can find themselves in a very attractive position.

One such company who recently experienced a failed IPO is Data Management Software developer Initiate Systems. They filed their initial registration for an IPO in November, 2007. Initiate Systems had big plans for the capital that was to be gained from their IPO. They had previously stated that they were hoping to use the capital raised to fund internal development of new products, to pay off some institutional debt and to help facilitate possible future acquisitions. However, Initiate Systems withdrew their registration in June, 2008. Unfortunately for Initiate, poor timing seemed to be their biggest issue. In the midst of a recession the availability of institutional investors was severely limited. Realizing that they weren’t going to be able to release an IPO with desirable enough terms, they withdrew their request with the understanding that a point later in time might be more attractive to complete the process. In a year or two, if the economy is back in full swing, they may attempt to go through the process again, with their probability of success increased.

Probably the most cited successful IPO was Microsoft’s, in March of 1986. Most successful IPOs follow the typical pattern of a steep climb, followed by a peak, a drop-off and then settling down at the end of trading. Microsoft however, pretty much increased in value throughout the day. The issue price was set at $21, but such a high demand for shares drove the price over $25, eventually peaking at over $29 a share, yielding a profit of nearly 40% in one afternoon for those able to get in on the opening price and sell at the peak. Probably what distinguishes Microsoft’s IPO from others at that time was the sheer demand and high volume of trading in that first day. In fact, more shares were offered as the day went on as a result of that high demand.

IPOs have been a mixed bag, though. The early 2000s saw a flurry of IPOs for technology companies, who had little to offer as far as actual products were concerned but who were able to generate a lot of buzz, leading to an explosion of overnight millionaires, essentially creating a bubble that would eventually burst and kill the technology sector for a period of time.

I find IPOs vastly interesting, and I’m not alone. Many academic articles lately have been focusing on predicting the success or failure of an IPO. With millions of dollars at stake, I can certainly see why. If you’re interesting in seeing which company’s have IPOs on the horizon, I suggest you check out the MarketWatch website.

-Michael

Twitter: @michael_dink