November 11, 2011
The Value of IPOs
Businessweek says: Groupon, Beware: Of 25 Hot IPOs, 20 Tanked Later.
The New York Times Dealbook says: Bankers Reap Windfall in Groupon I.P.O..
And Carl Richards at the New York Times Bucks Blog concurs: Think Twice About That ‘Hot’ New I.P.O. Richards explains:
And in case there is any doubt, almost every study I can find on the performance of I.P.O.’s shows the same thing:
-- Looking at 1,006 I.P.O.’s that raised at least $20 million from 1988 to 1993, Jay Ritter, a University of Florida finance professor, showed that the median I.P.O. underperformed the Russell 3000 by 30 percent in the three years after going public. The same analysis showed that 46 percent of I.P.O.’s produced negative returns.
-- Another study focused on I.P.O.’s issued in 1993 and their performance through mid-October 1998. The average I.P.O. returned just one third as much as the S&P 500 Index. Over half traded below their offering price and one third went down more than 50 percent.
-- A study by what was then U.S. Bancorp Piper Jaffray looked at 4,900 I.P.O.’s from May 1988 to July 1998. By July 1998, less than one third of the new issues were above their initial offering. Even more startling, almost a third were no longer traded (that is, they went bankrupt, got acquired or were no longer traded on an active market).
-- Of 1,232 I.P.O.’s issued from 1988 to 1995, 25 percent closed on the first day of trading below the initial offer price. Adding insult to injury, “extra hot” I.P.O.’s, the ones that rose 60 percent or more on their opening day, performed the worst over the long term and underperformed the market by 2 to 3 percent a month during the next year.
So the math says it’s a bad idea — but we keep doing it. Maybe it is the word “hot” that gets us excited.
That, or maybe we're unduly influenced by companies like Morgan Stanley, Goldman Sachs and Credit Suisse. Those companies were the co-lead underwriters for Groupon's I.P.O., and they scored $29,120,000 in fees. The 14 underwriters collectively gained $42 million in fees from the offering. Nice work, if you can get it.