Who wouldn’t want a piece of Facebook, LinkedIn, Groupon or Twitter? Reports that the companies are in various states of “going public” are making headlines and attracting investors with the prospect of getting in on the ground floor with a stock that will soar with the fortunes of these hot, young companies.
Dreams don’t always come true. History shows that initial public offerings might best be left to experts or high-rolling gamblers. Some newly public companies take investors’ money and multiply it like the good steward in the Bible. Others - the “bad stewards” - do the financial equivalent of burying it in the soil. A few IPOs fail spectacularly, but unlike the prodigal son, they don’t come back.
The worst performing IPO of 2010 has produced negative returns of 69.3 percent. That distinction goes to Mitel Networks, a technology firm that offered shares at $14 each on April 21, 2010, said Renaissance Capital, an IPO research and management firm based in Greenwich, CT. The company’s first-day return was a negative 12.1 percent and today Mitel (MITL) is trading in the $4.30 to $4.60 range.
The technology company, Broadsoft, produced the best returns – 385.1 percent – for a 2010 IPO. The company first offered shares on June 16, 2010 for $9 each, Renaissance Capital said. The company (BSFT) is trading in the 42.86 - 44.22 range today.
Full of risks and rewards, the IPO market is picking up this year. In the first quarter, 28 U.S. companies priced IPOs raising $12.2 billion, according to Renaissance Capital data, compared to the $3.5 billion raised by U.S. IPOs in the first quarter of 2010.
Retail investors willing to take on the risk of IPOs must clear barriers to participating in the offerings, which are geared to large institutional investors. To buy IPO shares investors typically need a large account with one of the investments banks underwriting, or sponsoring the deal.
Retail investors hoping to buy an IPO can set up an account with a discount broker with connections to an underwriter, but some of the discount brokerages only offer IPO shares to investors with large minimum balances, notes the website eHow.com. In any event, it’s unlikely the average investor will be able to buy a large number of shares.
Lack of information can also handicap the average investor. IPO offerings can also be difficult to analyze because companies going public often have little historical data. The shares are also subject to sudden drops in prices, which typically occur upon the expiration of lock-up periods that block company insiders from selling their shares. Like a siren’s call, the months of hype and media buzz that precede big IPOs can also turn an investor’s head.
Still, investors looking for the next Google or Microsoft, can access the IPO market through specialized mutual funds and exchange-traded funds, or ETFs, offered by discount brokerage firms. The funds spread IPO risk over numerous companies and require relatively low minimum investments, but management fees can be relatively high.
IPO funds have not won widespread acceptance among financial advisors, who recommend caution when entering the market and advise limiting exposure to IPO funds to less than 10 percent of a portfolio.