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. Investing

    Top Investment Banks In The Energy Industry

    Many global Investment banks are highly involved in the energy industry, but there are also some smaller banks and boutiques that are strong players.
  2. Stock Analysis

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Professionals

    Career Advice: Investment Banking Vs. Corporate Finance

    Read an in-depth review and comparison of a career in investment banking and a career in corporate finance, with advice about which one to choose.
  5. Investing

    Middle Market Investment Banks

    We take a close look at investment banks working with middle market companies.
  6. Fundamental Analysis

    Top Reasons IPO Valuations Miss The Mark

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  7. Investing

    Top Investment Banks In The Real Estate Industry

    The real estate market relies on capital provided by large global investment banks.
  8. Insurance

    All About Impaired Risk Annuites and Insurance

    What are impaired risk insurance products and understanding life insurance rate classes, table ratings and flat extra premiums.
  9. Professionals

    Career Advice: Investment Banking Vs. Investment Management

    Review an in-depth comparison between investment banking and investment management, their respective career paths and which one you should choose.
  10. Professionals

    Career Advice: Investment Banking Vs. Wealth Management

    Take a comparative look at two of the most popular career choices in the financial sector, wealth management and investment banking.
  1. 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 >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. How do corporate actions affect floating stock?

    Corporate actions, defined as a company's actions that affect the amount of outstanding company stock shares, can either ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  2. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  3. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  4. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
  5. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  6. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!