Introduction to IPO Process
I am sure if you are a finance guy you would have heard a lot about IPO Definition. Business newspapers keep featuring why a particular IPO process is hot, will it succeed, how much the company would raise, and many other things. For those who are new to this term, an IPO Definition or the IPO Meaning is “Initial Public Offering” is where a private firm decides to transform itself into a public one. This means it will offer its stock to be traded on the stock exchange for the first time, inviting the public to invest in the same.
Companies go for IPO process mainly to infuse cash in their capital structure for the proposed expansion, increase their market share, and give a push to their profits. The fact that an IPO process gives way to immediate access to capital is true but there are various formalities that need to be dealt with such as investigations, certain certifications, etc. A significant amount of planning goes into getting the IPO process into reality and many times in the past there have been disastrous IPO process cases that were launched only to be dished out within some time. Read through to learn about the Biggest IPO Flops in History. They were the IPO’s once considered to be hot and people bet on their successes but unfortunately market conditions, investor sentiments, and various other factors caused their demise. so this the all about the IPO Definition and the IPO Meaning.
7 Important IPO Process and Definition
Below are the 7 biggest IPO processes and IPO definitions:
1. IPO process (Vonage)
Vonage is a voice over IP network and Session Initiation Protocol (SIP) Company that offers telephone service via a broadband connection. Soon after its inception in January 2001, it became one of the largest VO IP providers in North America. Focusing majorly on branding and advertising activities together with managing the online phone lines became very expensive for them which resulted in a loss of around $300 million in 2006. This is when they decided to go public for the required capital infusion.
It was all geared up for a successful IPO and everything seemed to be in place. In fact, it raised $531 million on the very first day of the IPO. But what happened next made it the “worst first trading day”.
Shares were offered at $17 per share but quickly rushed 12.7% within the day to close at $14.85. Wondering what went wrong? Well, this IPO was different from others in a way that Vonage decided to offer 13.5% of the IPO shares to its customers. But strangely this tech company was caught up in a technical glitch! When the attracted investors went to the site to buy shares, many of them received messages that their purchases didn’t happen. After a few days there was a twist again, by then the share price had dropped considerably by 30% in a week’s time. The customers were informed that their purchases did happen and that the original price of $17 was due to them. Irate customers filed a suit which they won, against the underwriters and Vonage for misleading them. and this was the IPO Meaning
2. IPO process (Pets.com)
Pets.com was a company based in San Francisco that sold pet products online. The company created quite a buzz with their advertising campaign a dog sock puppet interviewing people on the street and with their tagline “Pets.com. Because pets can’t drive.” They also enticed some big investors such as Amazon.com. But a defective business plan did not make up for the same. They had a tough time generating profits for their online pet supply as customers didn’t seem keen on waiting for their pet foods or other things to arrive. The company was selling products at a cost less than it took to produce them and also undercharged shipping costs. It recorded losses of $147 million in just the first nine months of its business in 2000. They went public in February 2000 and raised $82 million! They share price started at $11 per share elevated to $14 but the success was short-lived and it crashed at meager 22 cents. It remained there and consequently, it filed for bankruptcy within the same year.
3. IPO process (Webvan)
Webvan had a great unique idea of delivering groceries without you having to carry the heavy grocery bags and take the pains to take them back home. You just had to sit at home order the groceries and within a span of 30 minutes, the groceries would arrive right at your doorstep. The investors were in agreement with this idea. Webvan decided to go for an IPO in 1999, they were valued at $6 billion although the revenue was slightly less than $5 million. At the end of the IPO, it raised a good enough $375 million from the IPO and the stock price doubled on the first day itself.
What next? Well, the company did not get a fairy tale ending. The great idea lost its charm against the whopping logistics cost it had to bear. In order to process and deliver each order, it cost them around $27 along with refined and automated systems of warehouses and delivery vans. In order to save costs, Webvan radically cut on the type of products bringing the sales to a halt. Just after 18 months of its flaring IPO, it declared bankruptcy.
4. IPO process (Blackstone Group)
Steve Schwarzman, the larger-than-life billionaire is the CEO and co-founder of Blackstone which is a Private Equity firm. Considered to be a spendthrift and rightly so he threw himself a multi-million dollar birthday party. The firm specialized in leveraged buyouts (LBO) and the majority of his wealth arose from using cheap debt to leverage the buyouts (typically the deal is 10% cash and 90% debt and hostile takeovers of numerous stressed businesses.
It came as quite a surprise when Blackstone announced their plans to go public in the year 2007. In their haste to get a part of Blackstone’s 23 % annual return since 1987, which was twice the S&P 500 average the investors ignored the fact that IPO was that of Blackstone holdings which were a spin-off of the Blackstone Group. The underwriters valued the IPO at $40 billion but actually, Blackstone Holdings had revenues of only $2.3 billion a year! In fact, the investors were warned in the IPO prospectus about a bumpy ride for the company in terms of revenue over the months or years but people did not pay attention.
As a result of the IPO, Blackstone raised $4.1 billion and enabled Schwarzman and his co-founder Peter Peterson to generate $2.6 billion, but the investors were the losers who had ended up buying a stock that lost 42% of the value in the very first year.
5. IPO process (Omeros)
Another case of an IPO flop was Omeros a biotechnology firm based in Seattle. The company was under trials for a drug that would aid in improving the functionality of joints post arthroscopic knee surgery. They decided to go for an IPO hoping that the cash it would generate will get them through until the time it gets approval from the Food and Drug Administration (FDA). Omeros filed for an IPO and went public in October 2009 and managed to raise $62 million with a share price of $10. But the stock within a month’s time lost the value of around 42 % as there were complexes in the drug approval process and also there were some unconfirmed rumors of corporate delinquency which ultimately ruined Omeros reputation. Their disappointing IPO performance has sunk the hopes of other biotech businesses that are in need of cash.
6. IPO process (VeraSun)
VeraSun Energy was known as a leading producer of renewable fuel and one of the topmost producers of ethanol. This was during the year 2006 when there was an ethanol boom and quite a few companies reputed themselves as producers of greener source of energy. This sector was at its peak and that was the time when VeraSun went public and successfully raised $420 million in June 2006. Investors were interested in ethanol producers as the oil and gas prices made ethanol production costs viable. As a resultant effect, the share price of VeraSun grew by 30% by the end of the day from the offering price of $23 to $30.
But the company went bankrupt just two years later. Why? Well the market for ethanol production completely sunk with the number of competitors and the rush in the price of corn during recession diminished the demand for ethanol Not only was the market for ethanol production saturated with competitors, the subsequent surge in the price of corn coupled with the decrease in the demand for ethanol due to the recession, provided a one-two punch that ultimately pushed the company into bankruptcy two years later. Similarly, there was a company called Aventine which raised $389 million and died the same way.
7. IPO process (Shanda Games)
Shanda Games is a huge name in the online gaming market of China. They produce multi-player role-playing games and is a division of Shanda Interactive Entertainment. Shanda decided to go for a U.S. IPO in 2009. JP Morgan and Goldman Sachs were the underwriters who would determine the number of shares to be offered and the price. At the very last second, the underwriters plunged up the number of shares to be offered from 63 million to 83.5 million. The result was extraordinary as the IPO raised $1.04 billion. Inappropriately greedy underwriters had actually pushed the share price at a limit of $12.50 were they attracted investors who were ready to pay the top dollar. But since there were no new investors left later the stock price hit the bottom falling 14% in value to $1.75 the very next day.
Apart from the Biggest IPO Flops in History, we discussed above there have been many IPO’s that have gone down the drain. The truth is that it is just not possible to forecast the nature neither of stock nor about investor sentiments. Although what we can learn from these failed IPO ventures is that any company should comprehend well of what is being sold and how it is to be sold before putting across its stocks for trading publically. this is was all about the IPO Definition and the IPO Meaning
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