This note considers Initial Public Offerings (IPOs),
particularly in relation to the 1990s dotcom bubble.
It covers -
supplements the discussion of innovation capital,
private equity funds, the
'new economy' and the bubble
elsewhere on this site.
Initial Public Offerings (IPOs) involve offering shares
to the public for the first time, usually with a prospectus
that details the investment offer. IPOs are often described
as flotation, going public or listing. Prior to an IPO,
enterprises that sell shares to investors
are considered to be privately held. The IPO allows investors
to liquidate some or all of their interest in the particular
entity when it becomes a public company.
In 1999 there were 457 IPOs on the NYSE, NASDAQ and AMEX
in the US, most of which were technology and internet
related. 117 doubled in price on the first day of trading.
Two years later the number of IPOs in the US was a mere
78; none of them doubled during the first day's trading.
In 2004 there were 260 IPOs in the US, raising US$51 billion.
That compared to 88 IPOs in 2003 (for US$18.6 billion).
The ten largest US IPOs in 2004 (including Genworth Financial
at US$2.8 billion, Chinese Semiconductor Manufacturing
at US$1.8 billion, Assurant at US$1.76 billion and Google
at $1.7 billion) accounted for 30% of overall IPO proceeds
in 2004, compared with 48% in 2003.
For the preceding periods indicators of activity are provided
by US IPOs (with IPOs on the NYSE and NASDAQ in brackets)
1986 - 464
1987 - 322
1988 - 121
1989 - 113
1990 - 89
1991 - 250 (56)
1992 - 338 (79)
- 437 (83)
1994 - 319 (57)
1995 - 366 (58)
1996 - 572 (105)
1997 - 391
1998 - 267
1999 - 457
2000 - 346
2001 - 78
2002 - 39
2003 - 88
2004 - 260
The popular image of IPOs is the opportunity for 'stags'
to make large initial returns when to stock lists, typically
through increases in value of 15% to 20% from offering
price to the market price at the end of the first trading
day). In the US the mean initial return is about 15 percent.
That phenomenon - often referred to as 'new issue underpricing'
- is evident in every nation with a stock market, although
the amount of underpricing varies from nation to nation.
The dotcom bubble saw start-ups
- few of which had made money (and many of which appear
in retrospect unlikely to ever make money) - gain huge
market capitalisations when listed through an IPO.
Examples include Globe.com, which on the first day of
trading went from US$9 to US$97 per share (an increase
of 866%), Value America from US$23 to US$74.25 per share,
VA Linux from US$30 to US$238 in its first day, Akamai
Technologies from US$26 to US$145, Marketwatch.com from
US$17 to US$97, PayPal from US$13 to US$20 and Webmethods
from US$35 to US$212.
Prior to 1983 publicly held firms in the US traditionally
began trading on the NASDAQ or regional markets before
moving to the NYSE. In 1983 the NYSE changed its listing
rules in 1983, making initial listing on that exchange
a viable alternative for some large IPOs. The NYSE minimum
listing requirements remained the same as for other firms,
but the exchange allowed the underwriter to certify that
the IPO would meet share ownership and distribution standards.
The initial listing decision then became an important
part of the IPO process, with the number of IPOs listed
directly on the NYSE increasing from 2.5% in 1983 to over
30% in 1989.
Shane Corwin & Jeffrey Harris's 2001 paper The
Initial Listing Decisions of Firms That Go Public considered
the initial listing decisions of IPOs that qualify for
NYSE listing, concluding that US IPOs are more likely
to list on the exchange that features their industry peers
and that (consistent with avoidance of delisting costs)
smaller - riskier - firms tend to list on Nasdaq. the
that the NYSE firms for listing. From 1981 to 1990 the
NYSE had a net gain of only 204 listed companies but after
it began to aggressively target IPOs in the early 1990s
the number of NYSE-listed firms increased by 1,133, from
1991 through 1996, including over 700 IPOs.
by Alexander Ljungqvist & William Wilhelm on IPO
Pricing in the Dot-com Bubble.
For Europe see in particular The Rise and Fall of
Europe's New Stock Markets (London: Elsevier 2005)
edited by Giancarlo Giudici & Peter Roosenboom
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