IPO: Successes and Failures of Stock Market Launches

The IPO: a stock market launch to boost its growth

An IPO, or Initial Public Offering, involves the introduction of a company's shares to the primary market. It is therefore the moment when this company decides to sell its financial securities to the public for the first time. This usually allows its founders to raise funds in exchange for the sale of part of the ownership in the company. For investors, it is an opportunity to buy a company's shares right from its beginnings on the market, with a goal of yield or capital gain.

In 1980, Apple launched its IPO, raising 101 million dollars. This event not only marked the start of the era of tech giants but also showed how an IPO could transform a company into a world leader. Take also for example Google, which launched its IPO in 2004. In just one day, the company raised 1.67 billion dollars, propelling its value to 23 billion dollars. Since then, Google (now Alphabet) has become one of the most influential companies in the world.

In 2014, Alibaba's IPO on the New York Stock Exchange enabled the company to raise a record-breaking 25 billion dollars, making it the biggest IPO ever. This not only strengthened Alibaba's position as an e-commerce giant, but also enabled the company to expand its services and enforce its international presence. Alibaba's employees have also benefited from the IPO, some of them making a lot of money from stocks, reinforcing motivation and commitment within the company.

Raising 17.9 billion dollars, Visa accomplished one of the largest IPOs in the financial sector. The company used these funds to reinforce its infrastructures and develop new products, thereby consolidating its position as a global leader in electronic payments. The IPO also allowed its employees to benefit from the company's success, and investors saw strong share price growth, reflecting the robustness and potential of the company.

But the frenzy around some IPOs can mark the history of economy and finance and launch more questionable long-term trends. Although the company doesn't exist anymore, Netscape's 1995 IPO is often cited as the kick-off to the dotcom bubble. The company raised 2.9 billion dollars, stirring minds around tech companies. Employees and investors made considerable gains and the IPO established a model for future tech businesses, marking a significant milestone that followed.

A stock market launch dating back to 1602

The stock market finds its origins in the Middle Ages, when merchants and money changers would gather in public squares to conduct business transactions. It was in Bruges, Belgium, in the 13th century, that the term « stock market » is believed to have been born, inspired by the Van der Buerse family, whose house served as a meeting place for these financial activities.

Over time, similar institutions emerged in other European cities, such as Antwerp and Amsterdam. The latter is particularly notable for having established the first official stock exchange in 1602, facilitating the trading of shares in the Dutch East India Company. Since then, stock markets have continued to evolve, becoming essential pillars of the modern global economy, where investments, speculations, and economic regulations take place.

The stock exchange offers several significant benefits to companies. By going public, a company can raise substantial capital by issuing shares, which allows it to finance its expansion, its research and development projects, or even to repay its debts. A stock market listing also enhances the visibility and credibility of the company, thus attracting potential investors and business partners. Likewise, the liquidity of shares allows shareholders to easily sell their stakes, making the company more attractive to investors and employees, who can benefit from stock-based compensation programs.

Launching an IPO: the reasons and key steps

The reasons why companies choose to go public through an IPO are varied. One of the main motivations is access to substantial capital. For instance, Alibaba raised a record $25 billion in its 2014 IPO, enabling it to finance its global expansion.

Becoming a publicly traded company offers several notable advantages. Firstly, it allows for raising funds in significant volume, providing essential fresh money to fuel growth, expansion, and innovation. Increased visibility is another major plus, as public companies often enjoy greater media coverage, enhancing brand awareness and attracting new customers. Additionally, the liquidity of shares on the market provides existing shareholders, including employees and early investors, the opportunity to easily sell their stakes, at least in theory. Lastly, companies can attract and retain talented employees by offering stock options and restricted shares as incentives.

However, there are obviously some downsides. The costs associated with an IPO can be considerable, encompassing underwriting fees, legal expenses, and compliance costs. Short-term pressure is also a challenge, as public companies often need to meet quarterly performance targets, which can hinder long-term initiatives. Moreover, they have to disclose detailed financial information and face significant public scrutiny and regulatory oversight. Finally, issuing new shares can lead to a dilution of the ownership of current shareholders.

IPO: an adventure that can fail at every step

The path to going public is not easy, and there are many and sometimes complex steps:

1. Preparation: Before thinking about an IPO, a company must get its finances in order, strengthen its governance, and ensure that its operations are transparent and compliant with regulations.
2. Underwriters selection: Investment banks play a crucial role in underwriting the shares and helping to set the initial price.
3. Regulatory filings: The company must submit detailed documents to regulators, such as the AMF in France or the SEC in the United States, explaining its business model, financial situation, and risks involved.
4. Roadshow: A series of presentations where the company's leaders meet with potential investors to stoke interest and assess demand.
5. Price setting: The final price of the shares is determined based on the interest shown by investors during the roadshow.
6. Launch: The shares are made available to the public on an exchange, marking the start of public trading.

The IPO project can be called into question at any of these stages.

IPO Preparation

Preparation for a company going public is an intense period of restructuring and verification. Companies often need to strengthen their corporate governance and ensure compliance with regulatory standards. They also need to prepare comprehensive documentation, including the prospectus, which gives potential investors detailed information about the company’s operations, financial condition, and risks.

Choosing the Right Investment Bank

Choosing the right investment bank is crucial for the success of an IPO. Investment banks play a vital role in underwriting the IPO, which involves buying the company's shares and selling them to the public. The right bank will have a solid track record, deep market knowledge, and a robust distribution network to ensure that shares are placed with appropriate investors.


Regulations and Compliance

Navigating the regulatory landscape is one of the most challenging aspects of an IPO. Companies must comply with various securities laws and regulations designed to protect investors. This includes filing detailed disclosures with regulatory bodies and adhering to strict governance standards. Failure to comply with these regulations can result in significant legal and financial repercussions.


Valuation and Price Setting of the Share

Determining the value of a company's shares is a complex process that involves analyzing financial statements, market conditions, and investor demand. The price needs to be attractive enough to entice investors while ensuring that the company raises the desired capital. Investment banks play a critical role by advising and setting the final offer price.


Marketing and Roadshow

Marketing the IPO is vital to generate interest and demand among potential investors. This typically involves a roadshow, where company executives and underwriters travel to meet institutional investors and present the investment opportunity. The roadshow is a crucial element of the IPO process as it helps evaluate investor interest and set the final offer price.


Launching the IPO

On IPO day, the company's shares are listed on the stock exchange and made available to the public. This day is often marked by significant media attention and market activity. The performance of the shares on the first day can set the tone for future trading and influence investors' perception.


Post-IPO Performance

The period following an IPO is crucial for the company and its new shareholders. The company's performance is closely watched, and it must continue to meet regulatory requirements and investor expectations. The performance of the shares post-IPO can be influenced by various factors, including market conditions, company performance, and broader economic trends.

Some examples of IPOs considered as failures

A poorly calibrated initial public offering (IPO) can lead to a flop with significant implications for the company in question. But even when a company makes it to IPO, success is not guaranteed: some IPOs have been accompanied by resounding failures often due to overvalued stocks or internal problems.

The most striking example is, undoubtedly, WeWork in 2019. Initially valued at nearly 47 billion dollars, the company had to cancel its IPO due to concerns over its governance and business model. The company's value then plummeted drastically, leading to the resignation of its founder and CEO Adam Neumann.

Uber, which also went public in 2019, is often cited as another example of a failed IPO. Although the company's IPO was successful, its stock price soon fell. Valued at 82 billion dollars, Uber raised concerns among investors about its future profitability.

In 2017, Snap Inc., Snapchat's parent company, experienced a rocky stock market debut. Despite initial enthusiasm, the stock price significantly decreased due to intense competition and uncertainties about user base growth.

Even Facebook, now one of the most iconic companies in the world, ran into problems during its 2012 IPO. Technical issues and accusations of overvaluation marred its stock market debut. The first day of trading was particularly chaotic, and the stock price fell sharply in the following months before eventually rebounding.

Blue Apron, a meal-kit company, also experienced a tough journey after its 2017 IPO. Valued at around 2 billion dollars, it quickly saw its stock price drop due to competition and doubts about the viability of its business model.

Other IPOs have truly been a failure. The IPO of Pets.com in 2000 raised 82.5 million dollars, but the company never achieved profitability. Within less than a year, Pets.com went bankrupt, becoming a symbol of the bursting of the internet bubble. Similarly, Webvan, which raised 375 million dollars in its 1999 IPO, couldn't sustain its business model and filed for bankruptcy in just two years. This resounding failure underscored the risks inherent in startups of the internet bubble era.

A successful IPO impacts stakeholders

The impact of an IPO extends far beyond simple financial transactions, affecting employees, investors, and sometimes the market as a whole. Success stories illustrate how transformational an IPO can be, while also reminding of the challenges and risks inherent to such an event.

For employees, an IPO provides unprecedented financial opportunities. Stock options and restricted shares become major assets. Stories of ordinary employees becoming prosperous investors multiply, reinforcing motivation and commitment within the company. However, this new era of transparency and public scrutiny also introduces intense pressure to achieve quarterly performances. The company culture, once relaxed and innovation-focused, often evolves into a more competitive and stressful environment. Heightened expectations and constant scrutiny can sometimes erode team spirit, creating challenges in maintaining the same work dynamics.

For investors, an IPO represents an exciting opportunity. Those who invest early can see their bets rewarded, with significant gains as the shares soar after the IPO. The promises of rapid growth and revolutionary technologies attract numerous investors eager to partake in this success story. However, this opportunity is not without risk. More cautious investors face the typical volatility of new stock listings, with unpredictable share price fluctuations. The future performance of the company remains uncertain, underlining the need for thorough due diligence before diving in.

Finally, in the stock market, a successful IPO has significant repercussions. It bolsters investors' confidence, stimulates market activity, and prompts other companies to follow the same path. The success of an IPO can act as a catalyst, encouraging investors to take more risks and explore new opportunities.

Are initial public offerings good for all companies

Placing capital in the hands of outside private investors or a restricted circle may present hurdles that are contrary to expectations. Turning to the market to finance growth is far from neutral.

Thus, IPOs can be a double-edged sword for innovation. On the one hand, they allow companies to raise substantial funds necessary for financing new projects and developing leading-edge technologies. These funds can catalyze research and development, propelling the company to the forefront of its industry. However, this same stock market listing introduces intense pressure to meet short-term financial goals, which may inhibit long-term innovation. Companies must juggle investor expectations and the need to stay competitive in the long run. Finding this delicate balance is crucial to maintaining an innovative edge while meeting stock market demands.

Likewise, start-ups face unique challenges when considering an IPO. Often lacking a solid financial history and the stability of more established companies, they may struggle to attract investors. The absence of strong financial data and the volatility inherent in their emergent nature increase the perceived risks by potential investors. However, a successful IPO can drastically transform a start-up, providing access to significant capital allowing to accelerate growth and finance ambitious projects. Thus, Amazon's 1997 IPO, though modest by today's standards, provided a launchpad for its rapid expansion and subsequent diversification.

While IPOs present considerable challenges for innovation and startups, they also offer invaluable opportunities. Companies that manage to navigate these turbulent waters can not only consolidate their market position but also open up new avenues for growth and development.

Today, the use of initial public offerings stands at a crossroads, faced with a series of challenges and opportunities. Economic conditions, regulatory changes, and technological advancements will all play a crucial role in the evolution of IPOs. To successfully navigate this dynamic environment, companies must stay informed and demonstrate great adaptability.