July 22, 2007
Orbitz and Private Equity "Quick-Flips"
On Friday, Orbitz Worldwide Inc., the online travel company, had its first day of post-IPO trading opening at $14.90 but falling 50 cents to close at $14.50. This came a day after its IPO had priced at $15 a share below expectations of between $16 and $18. The Orbitz IPO also occurred in a bad week as four of the ten companies making initial offerings (including Orbitz) priced below their offering range and three fell below that range in their first day of trading.
The IPO of Orbitz was unique, though. It had been criticized for impenetrable financial statement disclosure in its prospectus and nominated by one blogger as "The Worst IPO of 2007". Not a great harbinger. Moreover, Orbitz was a "quick-flip". According to the final prospectus, Orbity is owned by Travelport which itself is wholly-owned by a Blackstone-controlled fund. Orbitz sold stock worth $510 million in the offering but remitted all of the proceeds to Travelport which retains a controlling interest in Orbitz. And the quick-flip here was due to the fact that its IPO occured less than a year after Blackstone acquired Orbitz. Blackstone, in particular, has made some spectacular sums with quick-flips. For example, Blackstone scored a tremendous return with Celanese, taking the company public only eleven months after acquiring it; Blackstone has made over 2 billion dollars thus far on its $650 million equity investment.
But quick-flip offerings are not as sweet for investors. In their article, The Performance of Reverse Leveraged Buy-Outs, professors Josh Lerner and Jerry Cao found that quick flips - defined for their purposes as when private equity firms sell off an investment within a year after acquisition - under perform. This compared with private equity-sponsored IPOs generally which the authors found consistently outperformed other IPOs and the stock market as a whole. Investors take note.
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