Unless you live under a rock, it’s hard to escape the buzz surrounding Facebook’s recent IPO. Unfortunately for the social media juggernaut most of this attention has been negative. A simple search online for the phrase “Facebook IPO” brings up a whole roster of unflattering expressions, such as “horrendous,” “fiasco,” “disaster,” and of course, “flop.”
Perhaps I’m in the minority, but I think it may be too soon to tell if the company’s offering was truly a flop for the average investor (even if it was over-valued). There’s just too much potential, and too many “what-if’s” to discount the company so soon. I guess only time will tell.
And it could be that one of the real, almost subliminal reasons for such a strong backlash is that from the outside Facebook’s IPO resembles several notable IPO flame-outs that have occurred in recent years. In case you don’t remember, I’ve brought a few examples below. The following 13 IPO’s were real doozies, and it says countless volumes about the underwriters and inside investors involved in those deals as well as the fast lane to riches culture that has become the new American Dream.
1. Wired Ventures The IPO flop of Wired Ventures is a classic example of the over-inflated self-importance and heady speculation that characterized the dot com frenzy of the late 1990’s and eventually caused many companies to fail. The pioneer of new media, Wired Ventures was built around its award-winning print magazine Wired. But the company later expanded to include the online magazines HotWired and Wired News, the book publishing company HardWired, and an MSNBC show called Netizen.
By 1996, the company had about 340 employees and was losing almost $8 million a year total from each of its ventures. However, Wired executives maintained that the company would be in the forefront of a new media wave that would eventually carry them to profitability.
They hired big gun investment firm Goldman Sacks to assess its value for a planned IPO in 1996, but together with company executives, they came up with an outrageously high valuation of $447 million. In the face of tepid investor reception and a temporary dip in Internet stocks, the company eventually called off the IPO. Another failed IPO attempt would happen in 1998 before the company was sold to Advance Magazine Publishers, Inc., the parent company of Condé Nast.
2. TheGlobe.com Before there was Facebook, Twitter, or LinkedIn, there was TheGlobe.com. The online company got its start in 1995 as a social networking service where users from all over the world could create, customize and share content. Three years later the company went public. The IPO stock was offered at $9 a share and skyrocketed to $65 by the end of the trading day- the largest first day gain of any IPO in history up to that date. But when the online advertising market went bust, the company soon followed. TheGlobe.com’s stock price plummeted the next year. The company limped along for several more years before it was finally laid to rest in 2008.
3. eToys.com In the late 1990’s, eToys.com seemed to have everything going for it as a dot com: a recognizable, well-liked brand, a catchy series of advertisements that pulled at the heart-strings in just the right way and had parents around the country nodding their heads in understanding, a well-designed website, and an apparently strong market demand. But much like Webvan and Kozmo, what was lacking was the kind of logistical genius that has made the likes of Amazon.com such a huge success. It also planned a costly expansion at a time when demand had flattened due to cooling economic conditions and a much publicized miss-step during the ’99/’00 holiday season. In May 1999, eToys went public at $20 a share and watched its valuation jump to $76 a short while later. But, it was forced to declare bankruptcy less than two years later in February, 2001.
4. Webvan.com It seemed like a good idea at the time: provide Internet users with a convenient way to get their shopping done by ordering their groceries online and having them shipped right to their door in 30 minutes or less. Indeed, many investors agreed. When Webvan went public in 1999, the company was promptly valued at $6 billion (even though it only had slightly less than $5 million in revenues) and saw its stock price double on the first day. In the end, Webvan raised a cool $375 million.
But this good idea quickly lost its luster amid the costly logistical realities of providing such a service: it cost the company $27 to process and deliver each order and required a sophisticated system of warehouses and delivery vans. In 2001, just 18 months after its flaming IPO, the company declared bankruptcy.
5. Pets.com Getting customers to like your business won’t do you much good if your business model is fundamentally flawed. That is essentially what happened to Pets.com. The company was able to create a buzz with its cheeky advertising campaign that featured a wise-cracking sock puppet and the slogan, “Pets.com. Because pets can’t drive.” It even attracted some big time investors, such as Amazon.com. But in the end, Pets.com had a hard time generating a profits in online pet supply sales. Customers were not willing to wait for their pet food and other supplies, and shipping costs for the heavier items chipped away any profits. Pets.com went public on February 9 of 2000 and declared bankruptcy within the year.
6. Kozmo.com The story of Kozmo.com’s rise can be filed under the category of “things that make you go hmmm…” The company’s claim to fame: a promise to deliver your DVD movies and munchies in less than an hour with no minimum purchase. It’s trademark fleet of orange scooters could be seen out and about in 10 major cities throughout the U.S.
Unfortunately, making such small deliveries was not such a profitable proposition. In March 2000, Kozmo made a much publicized attempt at an IPO, but later postponed the offer when the market started to collapse. It never did make an offer. Instead, it started a round of layoffs that led to its eventual demise.
7. Vonage From its inception in 2001, Vonage quickly became one of the largest VoIP providers in North America. But in 2006, after suffering $310 million in total yearly losses, the company decided to go public to raise some needed extra capital. Shares were offered at $17 a piece but quickly plunged 12.7% within the day to close at $14.85. It was one of the worst IPO performances in 2006.
As if that wasn’t bad enough, Vonage decided to offer 13.5 percent of its IPO shares directly to its customers. But in a strange twist of fate, when interested customers went to the designated website to make their purchases, a number of them received the message that the purchase orders didn’t go through. Then, several days later, with the stock trading at a 30% loss, these same customers were told that their purchases had indeed gone through, but now they owed the original stock price of $17 a share!
8. Refco In August 2005, when Refco went public to the tune of $3.5 billion, it was one of the largest brokers of commodities and futures contracts in the country. But two short months later its stock value took a nose dive amid allegations that its CEO, Phillip R. Bennett, had concealed $430 million in bad debt for over a decade.
On October 17, Refco filed for Chapter 11 bankruptcy, and two years later Bennett pleaded guilty to 20 charges of fraud and was sentenced to 16 years in a federal prison.
9. VeraSun In 2006, when the ethanol boom was in full swing, several companies rose to prominence on the promise of producing a cleaner, greener source of energy that would reduce the nation’s dependency on oil. Many investors wanted in on the action, and that is how VeraSun, one of the top producers of ethanol, was able to raise $420 million when it launched its IPO in June 2006. But, its flame burned out quickly. 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.
10. The Blackstone Group Steve Schwarzman, the notoriously larger than life billionaire, is the co-founder and CEO of the private equity firm Blackstone Group. Infamously narcissistic, for his 60th birthday party, the “King of Wall Street” threw himself multi-million dollar party featuring Martin Short, Rod Stewart and Patti LaBelle leading a church choir singing “He’s Got the Whole World in His Hands.”
Much of Schwarzman’s wealth came from the use of cheap debt to leverage the buyouts and hostile takeovers of countless struggling companies. In 2007, Blackstone announced plans for an IPO, and many failed to appreciate that the deal was a bit too good to be true. In their rush to capitalize on Blackstone’s average 23 percent annual return, many investors overlooked the fact that the company being offered was a spinoff of the Blackstone Group, called Blackstone Holdings. Though the company was valued at $40 billion, Blackstone Holdings only had revenues of $2.3 billion a year.
Moreover, Shwarzman and his associates no doubt saw the upcoming collapse of the credit markets which would effectively decimate the cheap debt needed to support the buyouts. The result: Blackstone raised $4.1 billion with the IPO, allowing Schwarzman and his co-founder Peter Peterson to earn a cool $2.6 billion, while investors ended up with a stock that lost 42 percent of its value during its first year.
11. Groupon Looking back, there were plenty of red flags suggesting that Groupon’s IPO would flounder. Before the IPO even hit Wall Street, Groupon, the site that made daily deals famous, was already reeling from a series of PR snafus that included questionable financial accounting and reporting and the defection of two COO’s within six months. After making the biggest IPO since Google and raising $700 million, Groupon watched its value plummet about 40% a mere three weeks later.
12. Imperial Holdings In February 2011, Imperial Holdings a company that makes lump-sum payments to buy life insurance policies and structured legal settlements, raised approximately $179 million. Though it claimed to be a profitable business, reports show that the company consistently posted quarterly losses of many millions of dollars. An FBI probe quickly followed, the climax of which was a raid of Imperial Holdings’ offices in September of that year. Attention was then also given to suspicious investor activity that occurred immediately following the raid, but before the New York Stock Exchange could suspend trading on the stock. Predictably, Imperial Holdings’ shares quickly took a nose dive as much as 75 percent.
13. BATS It seems Murphy’s law was at work when BATS, the company that operates the third largest stock exchange in the U.S., experienced a malfunction of its software system on the very day of its own offering in March 2012. The “glitch” not only caused BATS to withdraw its offering, but even resulted in a well-publicized 9% drop in Apple’s shares. That same day, The Wall Street Journal reported that the Securities and Exchange Commission was in the process of investigating the alternative exchanges, including the BATS on the grounds that high-speed trading can cause problems.
Sources:
http://www.investopedia.com/slide-show/biggest-ipo-flops#axzz1uEPocEdG
http://money.howstuffworks.com/10-biggest-ipo-flops3.htm
http://www.cnet.com/1990-11136_1-6278387-1.html
http://www.billshrink.com/blog/4698/15-companies-whose-ipos-were-complete-flops/ http://www.inc.com/multimedia/slideshows/content/ipo-disasters_pagen_7.html
http://dealbook.nytimes.com/2012/03/26/others-in-the-i-p-o-hall-of-shame/
http://www.investorplace.com/ipo-playbook/bats-wins-the-gold-for-ipo-disasters/
http://www.reuters.com/article/2011/09/28/us-imperial-idUSTRE78R3TE20110928
http://www.bloomberg.com/news/2012-04-04/groupon-ipo-scandal-is-the-sleaze-that-s-legal.html