In the latest series of initial public offerings (IPOs) mania is Yahoo! Inc. which gained an impressive 154% on its first day of debut April 12 1996. Is this good news? Who benefits? Any losers?
Definition. An IPO is the first sale of common stocks by a corporation to the public.
Prior to Trading. Shares are sold, through an investment banker, to institutional investors (pension funds, insurance companies, etc.) prior to trading on an exchange. The exact price at which these institutions can buy the stocks for is typically set few days before the company's debut on an exchange. Yahoo! Inc., a popular search engine on the World Wide Web, was sold to the institutional investors for an initial price of $13 April 11 1996, one day before being offered to the public through the Nasdaq stock exchange.
The company issued 2.6 million shares, approximately 10 percent of its 25.7 million. At the $13 price, the company has a market value of about $334.1 million.
On the first public day. Yahoo! Inc. opened at $24.50 a share and roared to $43 before retreating somewhat and closing at $33; a 154% gain. The company, a graduate-school project that started a little more than a year ago, had a market value of $848 million, about one-third that of the technology giant Silicon Graphics Inc.
Underpricing It does not require a rocket scientist to observe that prices of IPOs have skyrocketed on their first day of going public. This is an underpricing of the original issue, in that, the institutional investors who bought the shares prior to going public got a bargain. Calculation based, say, on the closing price would indicate an underpricing of 154%.
Losers. The original owners, those who decided to sell their private holdings to the public, are the big losers as they could have gotten $33 per share instead of the IPO price of $13.
Winners. The big winners are the institutional investors who bought at the initial IPO price of $13. A paper profit of 154% per day is not bad. The annual percentage rate (APR) can be calculated using the following relationship:
APR = (periodic rate) x (number of periods) = (154%) x (365)= 56,210%
Can individual investors participate. This was the original motivation for this section. I thought I would give you great investment advice. Unfortunately, none of the financial institutions I called had an investment fund that specializes in IPOs. The companies I contacted include: Aim Funds, Charles Schwab, Fidelity Investments, Vanguard, Franklin Tempeltin, and H&Q. I am investigating this further. Maybe you can start your own IPO investment fund.
What happened to CompuServ Corp.'s IPO? CompuServe Corp.'s 16 million IPO shares were initially priced at $30. On its first day of going public, April 19, it opened at $35, but went down to a low of $32 3/4, but rebounded up to $35 to close at $33. Once again, at no point in time was the stock trading below its IPO price. The shares trade on the Nasdaq stock market under the symbol "CSRV."
Largest IPOs In History
In IPO history, Yahoo! ranks third after last year's Secure Computing Corp. (up 247%) and Home Shopping Network Inc. a decade ago (165%), according to Securities Data Co. of Newark, N.J. The previous number 3 was Boston Chicken Inc., which surged 142% when it went public in 1993. Last year's Netscape Communications Corp.'s IPO rose only 108% on its debut.