An initial public offering (IPO) of a company's stock on an organized stock exchange often raises substantial cash for the firm that issues and sells the shares. The money raised is used for a variety of purposes including acquisitions, paying down debt, expansion, capital improvements, and for declaring dividends to shareholders, owners, partners and senior management, as well as for future use as incentive bonuses.


Many legendary IPOs have produced billions in cash returns for the issuing company. However, for every high profile winner, there's another firm whose IPO was a flop, with some shares eventually even falling below the issue price.

From an investor's perspective, if the shares were not sold at a profit, near the market price top, then the IPO, while it may have been profitable for the issuing firm, might be a loser from the investor's point of view.

The average small investor seldom gets an opportunity to buy into an IPO offering from a major firm. Brokerage and financial firms which sell IPO shares typically reserve those shares for their biggest customers. Smaller investors can buy the shares after they come on the market, but not generally at the issue price, which is usually lower than the post IPO price.

Let's take a look at three high profile IPOs to see how they fared in the difficult economic climate of 2011. (For related reading, see How An IPO Is Valued.)

Nielsen Holdings
The initial public offering from Nielsen Holdings (NYSE:NLSN), which includes the international market research firm, Nielsen, Co., was the largest IPO ever in the U.S. offered by a private equity-backed group.

The IPO raised about $1.6 billion, with the stock closing at $23 a share, higher than the forecast of $20 to $22 a share. The firm is headquartered in Cincinnati.

ServiceSource International
ServiceSource International
(Nasdaq:SREV), based in San Francisco, is a major global vendor of revenue management software and services for technology-based firms. The initial offering of 11.9 million shares was expected to sell at from $7.50 to $9 a share, but sold out at $10 a share. Net proceeds were about $22.4 million and were earmarked to pay down debt. (To learn more on IPOs, check out IPO Lock-Ups Stop Insider Selling.)

A West Lafayette, Indiana, drug development firm, associated with Purdue University, Endocyte (Nasdaq:ECYT) initially filed for an IPO at $13 to $15 a share, but ultimately dropped its offering to $6 a share. The firm, however, offered 14.4 million shares at the $6 price, more than double the projected IPO of 5.4 million shares. Analysts calculate that the Endocyte IPO raised $94 million.

The Bottom Line
IPOs that succeed get lots of press, especially when speculators bid up the IPO share price after the offering. Shares of LinkedIn (NYSE:LNKD), a professional social networking firm, for example, doubled its price in one day. The investing public may think that any such widely-publicized venture is an automatic winner for the issuing company. The issuing company may profit from the higher share price if it has additional shares to sell at market prices. Often, a firm has no additional stock to sell after a major IPO, and so the upward trending price of their stock does not impact their bottom line. A company may, however, issue additional shares, but by doing so, they dilute the value of outstanding shares. (For more information, read What Is Dilutive Stock?)

Some major firms, including Facebook, delayed planned IPOs for 2011 because of poor market conditions and accounting problems.

Remember, there are two criteria for measuring the success or failure of an IPO. First, from the issuing company's point of view: Did the issuing firm raise the amount of cash desired? Second, from the investor's point of view: Did the investor sell the stock at a profit, or did he or she wait too long, and see the share price drop below issuing price? This is what happened to Groupon (Nasdaq:GRPN), and should serve as a lesson for investors looking to profit from IPOs in 2012.

Related Articles
  1. Professionals

    The Best Financial Modeling Courses for Investment Bankers

    Obtain information, both general and comparative, about the best available financial modeling courses for individuals pursuing a career in investment banking.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  4. Stock Analysis IPO: Is it a 'Buy' or Should You Pass?

    Demand for relationships is always high. Now you will have a way to directly invest in the relationship market. But is it priced fairly?
  5. Fundamental Analysis

    Investment Banks: Not a Good Bet Right Now?

    Investment banks might appear safe to investors at the moment, but they're probably more dangerous than advertised.
  6. Professionals

    Common Interview Questions for Investment Bankers

    Explore some of the most commonly asked questions in an interview for an investment banking position, along with suggestions for winning answers.
  7. Markets

    4 Companies That Made Billionaires Poor

    Learn how four once-successful companies in the stock market lost their way, and how these companies turned billionaire investors poor.
  8. Stock Analysis

    Toys 'R' Us Stock Doesn’t Exist: Here is Why

    Learn why investors cannot trade stock in toy retailer Toys 'R' Us. This privately traded company could be a hot IPO candidate for the future.
  9. Investing

    Deutsche Bank Undergoes a Significant Revamp

    The Deutsche Bank's reorganization is being called one of the biggest shake-ups at an investment bank in recent years.
  10. Stock Analysis

    Goldman Sachs Vs. Morgan Stanley: Comparing Business Models

    Take a closer look into the most noted rivalry on Wall Street between Morgan Stanley and Goldman Sachs, the last two standalone investment banks.
  1. When did Facebook go public?

    Facebook, Inc. (NASDAQ: FB) went public with its initial public offering (IPO) on May 18, 2012. With a peak market capitalization ... Read Full Answer >>
  2. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. What kind of assets can be traded on a secondary market?

    Virtually all types of financial assets and investing instruments are traded on secondary markets, including stocks, bonds, ... Read Full Answer >>
  5. Why would a company decide to utilize H-shares over A-shares in its IPO?

    A company would decide to utilize H shares over A shares in its initial public offering (IPO) if that company believes it ... Read Full Answer >>
  6. How do I place a buy limit order if I want to buy a stock during an initial public ...

    During an initial public offering, or IPO, a trader may place a buy limit order by choosing "Buy" and "Limit" in the order ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center