The Biggest IPO Flops
Ever since the credit crunch and Great Recession KO'ed the IPO market in the late 2000's, it has been difficult for companies to raise money and go public. But, a successful IPO is no guarantee of a long run as a successful company or stock; the IPO frenzy of the 1990s, for instance, created a great deal of excitement and small fortunes for nimble traders, but also left a lot of wreckage. This year is no exception, with the recent news of online gaming company King Digital Entertainment limping to the finish on its opening day of trading with a 16% drop from its IPO price. While King Digital has the dishonor of being the worst IPO so far this year, history shows that we'll have many more woeful IPO tales to examine as the year unfolds. Here is a look at some memorable IPOs from the past that failed, flopped or otherwise flamed out.
CIT Group - The Biggest of the Bunch
CIT Group has a history stretching back to 1908 and boasts of having done business with nearly 80% of the Fortune 1000. That did not prevent the company from running itself into trouble in late 1999, and management scrambled to find emergency credit facilities. The company then sold itself to Tyco in 2001, who then spun it out in an IPO that raised $4.6 billion in 2002. The credit crisis walloped CIT, though, and the company ultimately needed over $2 billion in TARP bailout money - a bailout that went for naught as they then declared bankruptcy in November of 2009. All that said, the company is still here; CIT emerged quickly from pre-packaged bankruptcy and now trades on the NYSE once again with over $8 billion in market cap. However, bad memories persist for those who held the stock into its previous bankruptcy.
Can't Spell Failure without "e"
It probably will not surprise long-time investors to see some famous e-commerce names on this list. Although Webvan, eToys and Pets.com were not large IPOs at the time ($375M, $166M and $83M, respectively), the stocks subsequently soared in the e-commerce/tech bubble of the late 1990s and became exhibits of the excesses of speculation.
Webvan went public in late 1999 on little more than hope. The stock doubled on its first day and the company quickly earned a $6 billion valuation, even though it had less than $5 million in revenue and cost over $27 to fulfill an order. The company flamed out quickly; going bankrupt in 2001. eToys and Pets.com likewise failed swiftly. Pets.com debuted on February 9 of 2000 and declared bankruptcy less than 300 days later. eToys took a bit longer to fail, going public in May of 1999 and declaring bankruptcy at the end of February in 2001. Some of its assets still exist as part of Toys R Us, but the company never came close to delivering on the hype.
Too Little Energy To Make it
Energy has also had its share of notable flame-outs. VeraSun and Aventine were born in the ethanol boom of the mid-2000's, both going public in June of 2006 and raising $420 million and $389 million respectively. Investors failed to appreciate how much competition there would be, to say nothing of the inherent difficulties of running a refining business. Both companies have since gone bankrupt. VeraSun bowed out in October of 2008, while Aventine failed in April of 2009.
Mirant also belongs on the list. The company's September 2000 IPO raised over $1 billion as part of its spinoff from Southern Company. Mirant never saw the high electricity prices that many expected in the 00's, though, and it soon crumbled under the weight of its debt and the industry-wide taint of Enron. The company declared bankruptcy in July of 2003, before reemerging in 2005, struggling some more and then agreeing to a merger with Reliant. They renamed the combination Genon Energy.
This Is Not A Game
While being a relatively young sector, electronic gaming has provided some notable IPO flameouts. Most recently, Dublin-based King Digital Entertainment went charging to the market on the momentum of its hit mobile game, “Candy Crush Saga.” King Digital has published over 180 games in its 11-year history, but none has brought the staggering level of success “Candy Crush Saga” has delivered: over 500 million downloads, $2 billion in sales and $567 million in profits. These impressive numbers led to another incredible figure – an IPO price of $22.50, which valued King at $7.08 billion.
Seeing as this isn’t your first slide in this show, by now you know there are no happy endings for IPO investors here. King’s shares sank to a low of $18.90 near the end of its opening day, leaving the company valued at $6 billion – a 16% drop, and handing it the unfortunate distinction of being the worst performing IPO thus far for 2014.
Of course, a failed IPO doesn’t equate to a failed company. It may just mean that investors need to adjust their outlook for King and its competitors. Gaming company Zynga Inc.’s (Nasdaq:ZNGA) current state may be where the Street’s expectations should fall for King Digital. Zynga came to the market with a story similar to King’s, with some analysts suggesting a $20 billion valuation. Zynga actually priced at $10 per share (a valuation of $7 billion) and fell only 5% on opening day. Only three years later, shares of Zynga trade for just over $4, as the company continues to search for another hit game to capture the market as it once did with “Farmville” and “Words With Friends.”
Other Famous Flops
It seems remiss to talk about hyped-but-failed IPOs and not include Vonage. Although Vonage is a going concern today, the company's $531 million IPO in May of 2006 was virtually a disaster - the stock fell 24% in its first two days and problems with the offering led to a class-action suit. Although Vonage flirted with bankruptcy, the company is still a going concern and generating actual operating cash flow.
Other names may also ring a bell or elicit a groan from investors with long memories. Genuity spun out as part of the Verizon and GTE merger. The company IPO'ed in June of 2000, and raised $1.9 billion. That was not nearly enough, though, as the company defaulted on its loans, went bankrupt in November of 2002 and was brought out of bankruptcy by Level 3. Proving that a good pedigree only goes so far, AMD spin-out Spansion managed to elbow Intel aside in the NOR flash market, but could not do so profitably. The company IPO'ed in December of 2005 and raised $506 million - only to go bankrupt in March of 2009 and reemerge in May of 2010.
It is the nature of the beast for some of these companies to flop; venture capitalists and company insiders want a quick cash-out, bankers want a payday and investors want to be a part of the next "new new" thing. All of that is a recipe for the periodic disaster, particularly when investors are more interested in getting into the action than buying a piece of a great business. So it really is not a question of whether there will be another big flop, only a question of when it will come and whether enough investors spot it in time to preserve their capital or avoid the mess entirely.