Successful IPOs Are A Matter Of Perspective

Commonly, an IPO is considered a disappointment if the newly listed company's share price stagnates or even falls in the first hours or days of trading. However, I believe that whether an IPO is to be considered a success or not depends on which perspective you look at it from.

This is a piece which I have been thinking about and working on for quite a while now. I had the initial idea back in October when I wrote about the IPO of British luxury car manufacturer Aston Martin. However, I did not quite make progress with the piece, so it went dormant for a while. Last month, after SoftBank Group Corp. (OTCPK:SFTBF;OTCPK:SFTBY) listed a third of its telco division, SoftBank Corp., I was reminded of the unfinished draft.

As I was finally able to gather my thoughts on the topic in a way that could be formed into a coherent (or so I believe) text, I would like to share my considerations with readers.

A Successful IPO From The Sellers' Perspective

Of course, the best possible outcome of an IPO would be to sell at a high price and to achieve an immediate increase in the stock price afterwards. One should, however, keep in mind that a company is normally not listed just for it to be listed. In the overwhelming majority of the cases, an IPO is exercised in order to raise fresh capital for the company or for the current owner of the company to exit parts of their respective position or even the entire position.

Assuming that the fair value for a company is X, what would be more beneficial: to sell for X - Y and let the price appreciate to X or to sell for X + Y even though this would mean that the price will decline by Y in the following days? Naturally, the latter option would be the one where you are better off.

The argument might be made that it can be useful to create the "right mood" in the market in order to cause a rally, which is achieved easier if the stock starts trading at significant gains. However, I believe that over a longer period (which is the time horizon that both investors and businesses should have), prices will be determined by "real" factors such as fundamental data, expected growth etc. than by mood and fear of missing out (if you do not believe it, just think about Bitcoin etc.). Therefore, if a stock doubles right after its IPO, I believe the company (or its former owners) should not be only excited about the solid performance but should also ask themselves whether they did not leave money on the table, which would have otherwise been available to the company to finance further growth or strengthen its balance sheet (or enrich the former owners).

Take, for example, the IPO of Aston Martin: if we assume that it was indeed overpriced, an IPO at or below the level to which the stock price has fallen since would have meant considerably less cash for the (former) owners (Aston Martin itself did not receive any of the proceedings). At the same time, those who retained part of their stake in the company would probably be in the same position they are in as of now regarding the value of their holding in Aston Martin.

The SoftBank Corp. IPO shows a similar picture: As I have written elsewhere, the roughly two-thirds of the company that the parent, SoftBank Group Corp., holds would probably have the same value that it has today. On the other hand, this way the parent was able to raise a record amount of capital, which it can use to reduce debt as well as for further investments.

As for example, Facebook Inc. (FB) and Ferrari NV (RACE), to name just some of the better-known, show that it is also not unheard of that a stock was first priced rather high, thus leading to considerable declines shortly after the IPO, yet still recovering and performing splendidly in the long run.

So, as you can see, from a seller's perspective, it makes sense to price an IPO as high as possible, even if it means to reduce the short-term upside potential.

The Other Perspective

Now that I have established the situation from a seller's perspective, it is time to look at it from the other side. This perspective is probably the more interesting one anyway, as most readers will be investors rather than looking to sell their business or a part thereof via an IPO I suppose.

While immediate capital gains for the buyers is not the objective that a company launches an IPO for, it is the reason why investors acquire the shares. As an investor, one should therefore be aware of the fact that it is in the best interest of the company, its existing owners or both (depending on what happens with the proceedings from the IPO) to charge as high a price as possible.

Investors should also keep an eye on whether or not the company will profit from the IPO in form of fresh capital. My rationale here is quite simple: being listed comes at a certain expense, and if the listed company does not get anything in return, it is not necessarily a good deal for this entity (and thus, neither it is for new owners). The seller(s), on the other hand, will have the cash generated from the IPO no matter how the newly listed company is affected.

On the other hand, if the proceedings go to the newly listed company itself, investors are basically enriching themselves just as much as the former owners, as the invested amount directly benefits the entity in which they own a stake and which would be enabled to invest in growth or strengthen its balance sheet.

Of course, the fact that an IPO is used as a method of "cashing out" by the owners of a company does not per se mean it is not worth an investment. On the contrary, if an excellent business is for sale (may it be due to the owners' need for capital or an exit planned from the beginning), it may very well be a golden opportunity. Yet, you should be aware that the seller possibly is of the opinion that this is the best price he can get at the moment (which is basically always the case if someone is selling a stock, IPO or otherwise).


Investors should generally be aware of the fact that it is in the interest of any seller to achieve as high a price as possible. Investors should also find out where the proceedings from an IPO will go.

I would also advise anyone who considers buying shares of a newly listed company to only do so if they want to own a piece of that company for a longer period of time, not just in anticipation of short-term spikes in the share price. As with any other investment, diligent research is a necessity.

And never forget: no one launches an IPO to enrich you. They offer you enrichment because they need your capital, and to get it, they have to offer you something in return - and ideally, that "something in return" is return indeed.

Disclaimer: All research contained in this article was done with utmost care. However, I cannot guarantee accuracy. Every reader is advised to conduct his own due diligence and research.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in RACE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.