Are you ready to drop some serious cash for some of that hot and fresh Facebook stock when the company finally makes its trading debut? To borrow an earlier generation's expression - you should cool your jets. Some of the most ballyhooed initial public offerings (IPOs) in history are today famous only for the speed at which they vacuumed out their early shareholders' wallets.
Technically, every stock in existence must have had an IPO at some point. But no one was turning cartwheels at the prospect of being among the first to own, say, Walmart stock when it began trading publicly in 1970. In fact, as a general rule, the more heralded the IPO, the worse it bodes for the company in question. Here are a couple of the most egregious IPOs in recent history:
(Note: To keep this article as engrossing as possible, we're excluding the "Internet" stocks that debuted during the dotcom bubble of the late 1990s. There were so many of those companies that had plenty of financing, but absolutely no sustainable business model, that if we included them they'd overshadow the legitimate companies that sold a worthwhile product, but simply traded for too much. The failed dot-coms are to the list of overpriced IPOs as Wilt Chamberlain is to the list of single-game NBA scoring highs.)
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One particularly notorious IPO is that of Vonage. The company, as you may know, sells VoIP telephony, which is phone service via your Internet connection, for those of you who a) still talk on the phone and b) prefer the inconvenience of a landline to the portability of a mobile.
Vonage's service is certainly legitimate. However, the introduction of its stock to the market was, to put it mildly, unorthodox. The company solicited its customers - the argument went, "Love our service? Then buy our company." Nevertheless, there's a time to move product and a time to sell shares, and the two should never overlap. It's almost inconceivable to think of any other concern - a chain restaurant, a gas station, an electronics retailer, a car dealership - getting you to buy its wares and then offer to sell you some equity on top of that. Vonage did, with somewhat predictable results.
Vonage went public in 2006, and opened trading at $17. Within a day, the stock had fallen to $13. The one-day drop of 24% wasn't unprecedented, but it was certainly unusual - the largest such drop of any stock that year. Customers who took the bait had their orders processed, but of course, they didn't receive the stock immediately. Those customers received it after much of its value had been wiped out, but were still required to pay the IPO price. Years later, none of these unfortunate investors are even close to recouping their losses on the IPO. Today the stock trades barely over $2, which is the same level it traded at five years ago.
For sheer speed of loss, it's almost mathematically impossible to top the recent performance of BATS. The name is an acronym for Better Alternative Trading System, and the seven-year-old company operates two electronic stock exchanges. No American stock exchange had been founded since Nasdaq in the early 1970s, making BATS something of a big deal. The company now bills itself as the nation's third-largest exchange. It was all set to trade its own stock publicly for the first time in March 2012.
Except it didn't. The very day of the scheduled IPO, a software bug sent the company's price reeling from its opening level of $16 down to 4 cents by lunchtime - a staggering 99.75% loss. Even worse, any stock that was available on BATS's exchanges (and which had the misfortune of having a stock symbol that started with the letter A or B) fell victim to the same bug. That included Apple, the largest corporation in the world, whose own stock fell 9.4% that same morning. The chief executive officer of BATS offered the obligatory apology, and the company decided to hold off on its IPO. The good news is that no BATS trader ended up out of pocket. Fortunately for sellers, if not for buyers, trades don't close until the end of the day. BATS never made it that far.
BATS remains a going concern. However, for a company whose very existence is predicated on efficiency (its slogan is "Making Markets Better"), it's hard to imagine a more apt victim of a software bug; nor a less opportune time for such a bug to surface. The IPO has been shelved, and should BATS ever go public again, it'll be with considerably less fanfare.
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The Bottom Line
There's a lesson to be learned here. While there are exceptions to the rule, for the most part any investment opportunity that's heralded and exalted in the financial media (or even more tellingly, the general media) should be treated with the utmost trepidation. This goes double for IPOs. When Berkshire Hathaway went public in the mid-1960s, few people outside of Warren Buffett's immediate family noticed. Or cared. Or invested. Today, stock market news is far more pervasive than it was then, and the desire to earn money through market movement as pronounced as ever. Still, caution with a largely unproven commodity will win out over recklessness almost every time.