On May 18, Facebook completed its much-anticipated initial public offering (its “IPO”, the first time a company sells its stock to all investors on an established stock exchange). It was by far the biggest IPO of an internet-related company, raising over $18 billion, and was the second largest IPO ever in the US. The initial share price was raised in the week before the IPO, as was the number of shares being made available, giving Facebook an overall value of $104 billion (a company typically only sells some if its shares in an IPO).
Facebook now has 900 million users and Max Wolff, an analyst at Green Crest Capital, noted that “this is more a spectacle, a media event and a cultural event than it is an IPO”. On the other hand, half of Americans feel Facebook is a fad whose appeal will fade and 70% of investors said they would not buy the stock. Rather than trading higher as expected, Facebook closed its first day of trading very near its offering price of $38 per share.
Here are the previous ten largest internet-related IPO’s (as compiled by Renaissance Capital, an IPO investment adviser), how they have fared through the close of trading on May 18 and how the diversified S&P 500 performed for the same period.
10) barnesandnoble.com (BNBN), IPO on May 24,1999, $450 million raised. BNBN started at $18, was trading below $1 by August, 2002 and Barnes & Noble, its parent company, bought the remainder of BNBN for $3.05 in 2003, for a loss of 83%. Over the same period, the S&P 500, including dividends, was down around 29%. The online division of Barnes & Noble was, in hindsight, an obvious casualty of the dotcom hype.
9) Orbitz Worldwide Inc. (OWW), IPO on July 19, 2007, $510 million raised. Orbitz, an online travel website, was offered at $15 a share and was at $3.24 on May 18, a decline of 68%, compared with the S&P 500 down about 8%.
8) Groupon Inc. (GRPN), IPO on Nov. 3, 2011, $700 million raised. GRPN came out at $20 and closed at $11.58, a decline of over 40%; accounting questions have dogged the discount commerce company and growth rates have slowed. The S&P 500 is up around 4% over the same short period, even with the 9% decline in the S&P 500 in the six weeks before May 18.
7) Renren, Inc.(RENN), IPO on May 3, 2011, $743 million raised. Offered at $14, RENN traded much higher on its first day but is now at $4.93, a drop of 65% from its offering price. The S&P 500 was down around 2%. RENN, a Chinese social network platform, capitalized on the Facebook frenzy a year before Facebook finally had its IPO, but slowing growth in China and concerns about the financial transparency of Chinese companies have taken a toll.
6) Giant Interactive Group Inc. (GA), IPO on Oct.31, 2007, $887 million raised. GA came public at $9.84 (adjusted for dividends) and is now at $4.95, a drop of 50%. The S&P 500 was down around 8%. The Chinese online game company was trading below $8 in 2009 when Shanda had its IPO (see Shanda at #4 below), which should have been a warning to Shanda investors.
5) Zynga Inc. (ZNGA), IPO on Dec. 15, 2011, $1 billion raised. ZNGA, which offers its online games primarily through Facebook, came out at $10 and is now at $7.16, a 28% drop, while the S&P 500 was up 7%. It is not clear whether ZNGA can maintain the popularity of its early games.
4) Shanda Games Ltd. (GAME), IPO on Sept. 24, 2009, $1.04 billion raised. GAME was offered at $12.50, was down 14% in its first day of trading, and is now at $4.27, a total drop of 65%. The S&P 500 was up 29% as it recovered from the financial crisis.
3) Infonet Services Corp., IPO on Dec. 15, 1999, $1.08 billion raised. The data communications service provider was bought by British Telecom for $965 million in 2005, 4% less than was raised; the S&P 500 was also down 4% for the period.
2) Yandex NV (YNDZ), IPO on May 23, 2011, $1.3 billion raised. YNDX was offered at $25, traded at $35 on its first day and is now at $20.47, a decline of 18% from its offering price. The S&P 500 was flat for the period. YNDX, the prominent Russian search engine, has fared much better than RENN, the Chinese firm that debuted in the same month.
1) Google Inc. (GOOG), IPO on Aug. 18, 2004, $1.67 billion raised. GOOG famously set its IPO price through a “Dutch auction” in which interested investors placed bids at the price they were willing to pay. GOOG was offered at $85, traded at $100 on its first day and is now at $600, a huge increase of over 600%, far outpacing the S&P 500’s rise of 37%. The popular search engine has expanded its services to become the dominant internet content and advertising company.
Compared to the S&P 500 over the same periods, these ten large IPO’s had eight losers, one market performer and one (really big) winner. If $1,000 had been invested in each of these IPO’s at their offering prices, you would have had $10,790 on May 18 (but only $4790 without Google). A similar investment in the S&P 500 would have left you with $10,360, not much of a return but without the anxiety of some of the large losses in particular stocks. Broader studies have found that the average IPO lagged the S&P 500 by significant margins over both its first year and first five years of trading.
Initial public offerings often generate lots of excitement and can involve leading-edge companies. They can also be profitable for the issuing companies, investment banks and skilled traders. Long-term investors may not fare as well.