Why BATS Killed Its IPO

By Marc Davis | April 11, 2012 AAA

Initial public offerings (IPOs) of a startup have often produced hundreds of millions of dollars in revenue for the firm making the stock offer. Last year, for example, several IPOs were immensely successful and had soaring stock prices.

SEE: The Ups And Downs Of Initial Public Offerings

Recent IPOs
Nielsen Holdings, which raised about $1.6 billion, is just one example of the huge sums earned by successful IPOs in 2011. Nielsen Holdings is the parent company of international market research firm, Nielsen, Co.

ServiceSource International's IPO raised $127.77 million. ServiceSource International, LLC, a U.S. firm with international sales, creates and sells revenue management software and services for technology-sector firms.

The Endocyte IPO generated $94 million. Endocyte is a pharmaceutical company affiliated with Purdue University.

The BATS IPO
BATS Global Markets, Inc. is a computerized-exchange operator – the third largest exchange in the United States - and was hoping for similar results as it anticipated its own IPO in March. However, seconds after trading in BATS stock began on Friday, March 23, the firm abruptly withdrew its offering. BATS claimed a "software bug" caused the firm to kill its IPO.

Reports, however, indicated that BATS had sought an unrealistically high valuation for the firm. Potential buyers of the stock reportedly brought pressure on BATS to abort the offering. Before the day ended, BATS claimed to have fixed the glitch that caused the shutdown. Government securities regulators have looked into the incident.

Reports circulated that BATS also squelched its IPO because of the potential for civil litigation and possible negative Wall Street perceptions of the company.

Several hedge funds and mutual funds, which had committed to buying BATS shares at $16 each, had backed away from their commitment. Giant financial firm Morgan Stanley, also a BATS investor, was among the companies that canceled their trades in the BATS offering. The $16-a-share opening price was considered too high and the price dropped by 75 cents shortly after opening.

SEE: 5 Tips For Investing In IPOs

Aftermath

In the wake of these missteps, the BATS board of directors voted to remove CEO Joe Ratterman from his position as chairman. He will continue as CEO and as temporary chairman while the firm begins looking for a new person to take the position.

This division of responsibilities between a chairman and CEO is not unusual, and it's consistent with corporate governance practices for small and midsize companies. Two other exchanges, NYSE Euronext and Nasdaq OMX Group, Inc., have a similar arrangement. So Ratterman's removal as BATS' chairman is not necessarily punishment for the IPO problem.

BATS may plan for a new IPO sometime in the second quarter, according to the company's founder and director, Dave Cummings. Shares in the new IPO, however, are expected to be valued lower than the $16 price of the original offering.

Meanwhile, a program to award cash bonuses to BATS employees, based on the revenues expected from the firm's IPO, has been suspended.

Despite the Friday computer glitch at BATS, the exchange functioned smoothly the following Monday. Some 10.3% of all U.S. exchanged-based stock trading was transacted through BATS facilities, the company reported.

The Bottom Line
Apologizing for the high-tech breakdown that forced a suspension of trading in BATS' shares, Ratterman said on the firm's website, "We know we have a lot of work ahead to win back the trust and confidence of our members, the industry and the investing public. And we will do everything we can to make that happen. You can count on it."

In a letter from Ratterman addressed to BATS customers and members of the trading community explaining the technical failure, he said, among other things, "Technology implementations are prone to failures and unexpected outcomes, even after going through rigorous testing. Every market center and every trading participant has experienced technical issues in their history. Our historical reliability has been very strong, with 99.9% uptime on our primary BATS BZX Exchange over the last three-plus years."

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