Without a doubt, IPOs are one of the most intriguing parts of the market.
You’re supplying capital to the economy by investing in a newly public company to help grow its business. And that will ideally grow the economy because the company will provide real goods and services to consumers, which will ultimately make you feel like you’re doing your part to keep the economy going strong.
Then there’s the more exciting and attractive side of things — becoming a shareholder of a company at the very beginning of its market debut.
For example, imagine investing in Wal-Mart when it IPO’d on October 1, 1970, and had an IPO price of $16.50. Or even investing in Amazon when it IPO’d on May 15, 1997, with an IPO price of $16.
Now, only a few decades later, those companies have become some of the biggest companies on the market. And today, if you'd invested when prices were low, you’d be set for life.
What Is an IPO?
IPO stands for initial public offering. Basically, it’s when a private company decides to start publicly selling its shares on a securities exchange such as the NYSE or Nasdaq.
There are a few reasons why a company decides to go public. Those reasons include:
- Raising capital to reinvest and grow a company’s business.
- Using stock as a currency for mergers and potential acquisitions.
- Maximizing shareholder value.
- Providing liquidity to investors and employees.
Most often, a company wants to put itself in a favorable light in order to get investors on board. More investors on board means that the company can earn as much capital as it can while also benefiting any early investors by maximizing their returns.
It’s important to educate yourself on a company and ignore any hype. Hype shouldn’t drive your decisions when it comes to investing in specific IPOs.
An IPO, for the most part, is an unknown entity — it’s been a privately owned company that never had to abide by laws from the U.S. Securities and Exchange Commission (SEC). As an investor, you don’t have access to any of the company’s quarterly financial results or its trading potential on the public market. However, companies that are going public have to file a prospectus with the SEC that provides potential investors with financial information about the company before it starts trading.
Investing in IPOs can be beneficial. The reasons why people decide to invest in IPOs are to see the long-term potential in a company, to have the ability to start investing when the company is in its early life cycle, and to profit from its future growth.
The Top IPOs in U.S. History
Here’s a look at the top three IPOs in U.S. history — in terms of how much proceeds the companies were able to make their IPOs:
1. Visa Inc. (NYSE: V)
Visa IPO’d on March 18, 2008, and earned $17.9 billion in proceeds. Visa was expected to price its IPO at $37–$42, but the company and its underwriters decided to price the shares above that expected price range, and it debuted on the market with a $44 IPO price.
Despite the bear market at the time of its IPO, Visa ended up carrying out one of the biggest-ever U.S. IPOs — its shares surged to 29% — and closed its first day by trading at $56.86.
Visa's successful IPO wasn’t entirely influenced by “perfect timing” but was probably also influenced by the slight desperation from investors who were waiting for an impressive company to come along. Visa also marketed itself in a way that showed that the company was a safe place for investors to put their money into.
2. General Motors Company (NYSE: GM)
General Motors Company IPO’d on November 17, 2010, and earned $20.1 billion in proceeds. Originally, General Motors had planned to set its IPO price in the range of $26–$29 per share. Instead, executives saw the demand for the stock and decided to set the share price at $33 per share.
The company ended up selling 478 million common shares. The U.S. Treasury remained GM’s largest shareholder since the company was in debt to the U.S. government’s $50 billion rescue. As a result, about $11.8 billion of GM’s proceeds went to the U.S. Treasury.
In 2009, GM went through a very scrutinized taxpayer-funded bankruptcy that significantly lowered costs and gave the company higher profit potential. So, it seemed like an IPO had the potential to be unsuccessful, but that obviously wasn’t the case. Instead, GM saw a strong response to its IPO, which reflected a growing confidence with investors.
According to Renaissance Capital, GM’s IPO made it the no. 3 in U.S. IPO rankings and no.7 globally.
3. Facebook, Inc. (NASDAQ: FB)
Facebook IPO’d on May 18, 2012, and earned $16 billion in proceeds. It took a few months for the company and its underwriters to settle on the share price target. They finally settled on $34–$38 per share. And when it came time for its IPO date, the company decided to open on the higher end with a $38 share price.
With that share price, Facebook was valued at $104 billion. And about two days before its IPO date, Facebook announced that it would be selling 25% more shares — a total of 421 million shares.
There was a lot of hype involved in Facebook’s IPO. Prior to going public, analysts tried to make sense of where Facebook would fit into the market and if its business plan would actually match up with its expected valuation.
Facebook’s market debut was filled with technical glitches that prevented orders from going through, which had investors very confused about whether their orders were successful or not.
The stock did hit $45, but it didn’t stay there for long. The stock struggled to stay above its $38 IPO price and closed its first day of trading with a disappointing $38.23 — only $0.23 above the IPO price.
Despite its disappointing IPO price, Facebook’s IPO did set a new record in regards to trading volume — selling 460 million shares. It also ended up being the third-largest U.S. IPO in history, making $16 billion. But it really struggled for the first year after its IPO with its stock having a hard time staying above its IPO price.
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The Wealth Daily Research Team