Denice R. Preston
For a long time, the IPO market seemed largely inactive. 2019 is breaking the norm, with many notable tech companies going live in stock markets. However, not all of these IPOs have been successful. What’s the procedure, and what factors determine the success (or lack of)?
For a long time for a long time, the public initial offering (IPO) market seemed to be completely inactive. It never recovered from the infamous flops of the dot-com bubble, where many experienced and less experienced investors lost significant sums of funds. The financial downturn didn’t help the revival of the sector; neither did the rise in private markets, nor the growth in super fund popularity.
2019 seems to be different from the norm, with many prominent tech companies making their debut on exchanges. Beyond Meat, Uber, Lyft, and Pinterest are just a few major companies that have made their stock public this year. Airbnb and The We Company (the parent company of WeWork) is set to debut on the stock market sometime in the coming calendar year.
There are many reasons why these IPOs have been successful. Consider the distinct experiences of Beyond Meat and Uber. Beyond Meat (NASDAQ: BYND), which we have mentioned in another article, is described in the news as one of the major success stories of the past few years, not just in 2019. It was the top-ever one for a company listed for more than $200 million since the 2008 financial crisis. The article by Howard Lindzon wrote on July 29th, “The best performing asset of 2019 is Beyond Meat–at $14 billion, it has a larger market cap that 30 percent of all S&P Companies–and which Ivanhoff calls a biotech edible.” (Note this was written just before Beyond Meat announced its unexpected follow-up offering, and it took the stock down by a substantial amount in the market, but it has risen by around 170% from its initial public offering).
On the contrary, Uber Technologies (NYSE: UBER) is being portrayed by many reports as a failure and a failed IPO. Uber Technologies raised more than $8.1 billion in funds. However, it could not reach its valuation goal of $100 billion. The stock plummeted quickly on the initial day of trading, making it one of the most shaky IPOs with a value of more than one billion dollars.
To IPO or Not to IPO?
A few occasions are significant in the history of a business, such as a public listing through an IPO. A public offering is the procedure for the company’s transition from privately owned to listed on an exchange. Being listed publicly has many benefits but is also complicated and expensive. Fewer companies opt to list their shares and tend to do it in later stages. Why would a business go through such a long and intricate procedure?
The primary goals of an IPO are to raise capital and offer liquidity to existing investors. These will mainly include the founders, employees, and management, as well as the early investors like angel venture capital, venture capital, and private equity investors. Beyond these goals, however, an IPO is also a source of many advantages and obligations. Some benefits include a boost to reputation, a growth in the number of investors, and a clear value (liquidity). However, some responsibilities have greater scrutiny by market participants and new investors and increased regulatory burden.
IPO Process and Execution
The IPO process typically lasts over a year. It begins with an internal review of the firm’s ability to meet its corporate governance and management structure, along with a comprehensive analysis of the possible interest of investors who are interested in stocks of this kind.
It is important to note that the IPO process itself is very complicated. First, the company must choose at least one of the underwriters (the investment banks who will be responsible for the pricing and selling of the listed shares). Following that, there is a regulatory process and due diligence procedures to ensure the firm complies with its regulatory requirements. After that, the SEC accepts the IPO. Pricing and price-discovery methods follow, and investors are asked to decide the conditions and prices at which they’d be interested in these shares. Then, the initial phase of trading starts, and stabilization strategies are employed to ensure a market for the new claims. Then, after about 25 days, it is time to transition back to regular trading in the market.
When shares of a company are public, the company’s legal obligations are increased significantly. The burden has risen dramatically following the dot-com crash of the 90s, the direct result of corporate scandals like Enron and WorldCom that forced the regulators within the US to create legislation known as the Sarbanes Oxley Act (SOX). Publicly owned companies must regularly provide detailed financial information each year and important corporate governance systems in place. To comply with this, any company considering an IPO will need to employ compliance and legal staff knowledgeable of SEC regulations. On the other hand, this can add an amount of credibility to the business because it can withstand higher standards of scrutiny.
What Alternatives Are There to an IPO?
Historically in the past, traditionally, an IPO was the preferred option for investors at the beginning of their careers for early-stage investors to “exit” from their portfolio businesses. An IPO was considered the most important step a company needed to take to attain its full maturity. It consequently altered its investor base from speculative, specialist investment firms to more conventional investors such as long-only or mutual funds and retail investors. As the quantity of capital available in private markets has grown significantly, man companies have opted to utilize this method to finance themselves, usually gaining more money through this method than via their final IPO. Uber is an excellent illustration: Uber has collected $24.7 billion in 22 rounds, and only $8.1 billion was raised via public markets.
This doesn’t, however, necessarily mean that consumers have no chance to get exposure to tech backed by VC businesses following the departure of venture capital investors. As the graph below illustrates, a more frequent option for exit has been the transfer of a business to a different (often open) company. Investors have the option of investing indirectly, For instance, purchasing shares on Facebook could expose investors to the two platforms, WhatsApp and Instagram.
Defining the Success of an IPO
Once the procedure, the consequences, and alternatives to an IPO are being explored and discussed, it’s time to consider what constitutes an IPO successful and what happens when it’s deemed as a failed IPO.
Sometimes, companies are forced to cancel their IPO altogether, as is the case in the case in the case of AB InBev in Hong Kong in July 2019. This drastic decision is usually a miscalculation of the market demand for investors, concluding that it’s better to put off the process rather than risk the possibility of failure.
