When a private company offers its shares to the public for the first time, we call this process the initial public offering. In return, the said company earns equity capital.
This helps generate buzz among early investors. Since many will want to buy it, the company’s stock price will rise.
However, this process doesn’t always succeed. In this article, we’re going to focus on the ugliest failed IPOs you can learn from.
The IPO procedure
The IPO process is quite lengthy. Experts evaluate the company’s management and governance structure. They also check if stock investors are interested in its shares. This evaluation can last over a year.
Initiating the IPO itself is also a complex task. The company must first choose one or more investment banks. These banks both price and sell the company’s shares. A series of regulatory filing and due diligence processes then follow.
The company then discusses the pricing with potential investors. They voice their conditions and prices at accepting the offered shares.
The trading then beings. The company employs stabilization methods for the first 25 days to create a market for its shares. Then, the market transfers into a regular one.
What is a failed IPO?
The stock prices must reach the value of the original listings. Otherwise, the IPO has failed.
The pros of IPOs
The increased stock equity participation will lure in more qualified workers.
An IPO initiates a great cash flow from public investors. This can increase the company’s public presence and increase its profits.
Later, secondary offerings will bring in even more capital.
Quarterly reporting will make the company much more transparent. This can give it an edge when securing loans, especially compared to private companies.
The cons of IPOs
Information goes public
The decision to go public is an all-or-nothing choice. Following an IPO, the company has to reveal much of its information.
Attentive rivals could make use of this information to gain an edge. A private company has a right to keep its secret, while a public one does not.
Apart from the IPO price itself, managing a public company is no small feat. The costs pile up quickly and they often have little to do with doing business.
Directors of public companies tend to be rigid in their approach. This can make many skilled managers leave. Without them, securing further profits becomes much harder.
Once the company’s shares enter the stock market, they behave accordingly. Thus, the prices of these shares aren’t a true reflection of the company’s financial performance. Instead, can change based on the fluctuating stock market prices.
Options similar to IPOs
Dutch Auction – IPO price not set in stone
True to its name, this type of strategy truly resembles an auction. Since the IPO price isn’t defined, new investors have to bid for the shares. The shares then go to the highest bidders.
Direct listing – no investment banks involved
Direct listing happens without the help of underwriters (investment banks). The main appeal of this method is the much higher share prices.
However, this can be a double-edged sword. If a direct listing fails, it leads to greater losses. Therefore, only the most renowned brands can afford to take this route.
10 ugliest examples of a failed IPO
Enjoying huge success, Uber lured in countless investors. By 2018, the app had a value of over 70 billion dollars. Uber wanted to go public the following year. At the time, investment bankers valued the company at a shocking 120 billion dollars. If true, this would have been the biggest IPO Wall Street had ever seen.
Needless to say, this didn’t happen. The company kept lowering its predicted value until it fell all the way to 91 billion dollars.
When the IPO finally arrived, investors were put off by poor earning reports from Lyft. This company is one of Uber’s biggest rivals. At the same time, many new ride-hailing apps were popping up in South America and China.
The stock traded for $45 which was within Uber’s expectations. However, it plummeted by almost 7% by closing. The investors who purchased the stock lost a cumulate 655 million dollars in a single day.
Uber received a market capitalization of almost 70 billion dollars. This was lower than their lowest expectations.
As of 2022, Uber remains in business. However, it entered the first profitable quarter in November 2021.
To this day, Facebook remains one of the high-profile companies. It later changed its name to Meta.
Apart from Facebook, the company also owns Instagram and WhatsApp.
But Facebook hasn’t always been such a success. Back in 2012, it experienced one of the worst IPOs ever.
When it went public in 2012, the debut didn’t go smoothly. Due to technical issues, there was a delay between Nasdaq’s opening bell and the actual beginning of the buying period.
Thus, many trades went unregistered while others were priced incorrectly. The stock never reached past its opening share price.
Certain rumors further complicated the IPO. Facebook apparently shared some information about its earnings with banks. However, it didn’t disclose this information to its investors.
The following lawsuits made the share price drop further.
What doesn’t kill you only makes you stronger. This certainly was the case with Facebook. Despite the enormous flop, the company did really well in the following years.
Webvan was an online service that delivered groceries. Though it started in the US, it eventually took over 10 additional markets.
Webvan was founded in 1997. Two years later, decided to go public. The IPO was a success and they raised 375 million dollars. Thanks to private investors, they received an additional 1 billion dollars. Still, it managed its funds poorly.
One of the biggest reasons Webvan failed was its costly warehouses. Because they were automated, they cost 25 million dollars to build. This didn’t include the costs of employees and servers.
The expenses quickly rose above the profits. Though Webvan tried to steer the ship from its impending doom, they failed. They tried to do so by cutting down on the diversity of their products. This forced even their most loyal customers to stop using the site.
In 2001, the company’s single share was worth just 6 cents. It went bankrupt in the same year.
Vonage was one of the most successful tech companies in 2006. It dealt with managing phone lines. However, this led to great expenses.
To offset its losses, Vonage went public in May 2006. They managed to get over 500 million dollars via the IPO.
The IPO itself was a bit special. The company offered 13.5% of its shares to its customers. They could buy them via a website created by investment banks.
But the whole thing ended in a fiasco. Due to technical difficulties, many of these transactions seemingly didn’t go through.
Days later the underwriters told the customers they still have to take responsibility for the shares they bought. However, the stock price plummeted by 30% in the first week.
The customers naturally weren’t happy with this development. They sued the underwriters and won 800,000 dollars in fines.
Another lawsuit followed soon after. It was for misleading the investors. This complicated things for Vonage even further.
In spite of these shortcomings, Vonage still does well today. Now, it deals with cloud-based communications and phone services. In 2021, Ericsson bought Vonage for over 6 billion dollars.
Shanda Games was a Chinese company that specialized in online games. It hoped going public would help it establish itself in the US market as well.
Shanda Games reached out to two moguls among underwriters – Morgan Stanley and Goldman Sachs.
Together, they increased the estimated value of their shares to over 80 million dollars. Despite being a last-minute decision, it was very successful. The IPO managed to raise over 1 billion dollars. This made it the most successful US IPO of 2009.
However, this high pricing proved to work against the company in the end. Because most investors already bought the expensive shares, no new ones turned up. The stock price kept dropping steadily until it reached 1.75 dollars.
Shanda survived despite the odds. But now, it no longer deals with online gaming. Instead, it focuses on investment and asset management.
This website offers pet supplies on the Internet in the 90s.
The company went public in 2000. Its IPO was a huge success, raising over 80 million dollars. Despite the success, Pets.com didn’t know how to manage its finances.
While consumers love cheap shipping and products, this resulted in low revenue. It wasn’t long before Pets.com crumbled.
It happened 9 months later. At the time, the company’s share dropped from 14 dollars to 22 cents.
TheGlobe.com was Facebook’s less successful predecessor. The site allowed people to create and share content online. It could be considered the prototype of social media.
The firm’s IPO happened in 1998. On the very first day, it enjoyed huge success. Its stock rose from 9 to 65 dollars. At the time, such an increase was unprecedented.
However, it fell together with other online websites. In just two years, its shares fell from 97 dollars to mere 10 cents.
Lantronix used to produce electronic monitoring devices. The company decided to go public in 2000. Once its IPO shares dropped from 9 to 6 million dollars, its demise became clear. Lantronix then lowered its share price to 10 dollars from the initial 15.
Its shares dropped by 20% on the first day when it became public. Its underwriter then acquired the company. A federal investigation then followed because of the attempts to push an already crumbling stock.
In its final moments, Lantronix’s shares were worth only 70 cents each.
eToys.com was a website that sold toys online. (Obviously)
However, it overshot its budget for infrastructure. While keeping up with the demand was necessary, the profits never outweighed the expenses.
In 1999, the company went public. The first day was quite successful and their shares were worth 85 dollars each.
During Christmas of the same year, the company couldn‘t deliver enough products by the scheduled date. To prevent this from happening again, they constructed two large warehouses. However, the demand for their toys dropped.
The company went bankrupt in 2001. At the time, their shares were worth only 9 cents each.
A biotechnology company located in Seattle, Omeros experienced one of the ugliest IPO failures in history. It happened back in 2009.
Omeros decided to go public while developing a new drug. This medication was to soothe pain and improve joint mobility after a certain type of knee surgery. However, it would take a while before the FDA approved the drug.
The leaders’ idea was simple. Until the approval, they could eke out on the money provided by an IPO. With this in mind, Omeros went public on the 7th of October. While they managed to raise over 60 million dollars on a share price of $10, their success was short-lived.
Mere weeks later, the company’s stock quickly lost value. At the same time, a former CEO claimed the company made false timekeeping records for NIH. Though Omeros survived this ordeal, it’s not an appealing investment anymore.
What can these IPO failures teach us
Popularity doesn’t equal value
Unfortunately, investing in popular firms doesn’t guarantee profit. Many investors learned this the hard way.
A little bit of research can go a long way
Though newspapers and social media have many virtues, credibility isn’t always one of them. While these platforms flaunt the benefits of IPO investing, it’s just a marketing strategy. Many firms use this method to set up their IPOs.
To avoid any regrets, learn to use your own head. Research accordingly to find out if the IPO is worth your time.
Pay attention to valuations
To successfully invest in a company, you have to pay the right stock price. Fortunately, you can follow this basic guideline to determine it.
For your investment to be worth it, the company must be flourishing. Additionally, it must grow in the future. This means accruing more and more sales and earnings. The higher revenue will lead to increased market share.
Check whether the company has an advantage in the current IPO market. It should also have dependable management. If all of the above checks, the stock might be worth your time.
However, keep in mind that this type of investment is quite costly. Investment banks often set the company valuation high. Before you decide to pay such an exorbitant sum, check if you have any better options.
Never decide blindly
Investing isn’t gambling – you don’t just roll the dice and pray for the best. While inexperienced investors might often treat it this way, they soon learn the error of their ways.
Knowledge is power. Always have a plan when investing. Research and evaluate every fact and piece of data you can. Then, build your strategy.
This will increase your odds of higher long-term returns.
Play the long game
A common trap for new investors is to play for a quick profit. However, this can lead to great losses in the long run.
Before you invest, make sure sure the stock will do well, even in face of a financial crisis.
Final thoughts on failed IPOs
The main goal of an IPO is raising capital and granting investors liquidity. During its early stages, an initial public offering benefits mostly the founders and employees. It can also help early investors like venture capital and private equity funds.
Apart from these benefits, IPOs can increase the company’s reputation and investor base.
However, it IPOs do have some drawbacks. Maintaining a public company is often costlier. Furthermore, it may be forced to reveal its business information. This can inadvertently help the competitors.
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