IPO, Initial Public Offering or??

IPO which was a sure gain scheme during a boom time in 90s became an urban legend that you will definitely rewarded with handsome gain if you apply it. The legend happened most of the times during 90s. There were people lining outside the brokerage houses overnight in order to get the IPO form. Some even pay out some money in order to get an application form.

Euphoria against IPO made investors act without rationality. Take an example, VA Linux. When it was 1st day trading of the shares (9th December 1999) in NASDAQ, there was no trading that morning until the price soared $290 against its IPO price of $30. The stock peaked at $320 and closed at $239.25, a gain of 697.5% in a single day! What is its underlying value? It valued at a total of $12.7 billion ($12,700,000,000) when it reached its peak price on day one. The company history? Less than five years old, it registered a cumulative total of $44 million in revenue with loss of $25 million! If you are an investor looking for private company, will you invest in the company with lousy performance like this? Definitively not!! But, it happened in equity market!! What’s its price on 21st March 2006? $3.71.

While billion of dollars lost by the average Joe who handled their hard earned money to invest in “Next Microsoft”, who gain from this frenzy mania? The money invested would not evaporate in the air unless there are Martians who take it out, so who is the beneficiary of this IPO euphoria? The answer is very clear here.

Will same history repeat? I don’t know. Maybe it is worth while to look at the examples shown below:

Baidu (A 5 ½ year-old dot com company, the largest search engine in China) IPO which set on 5th August 2005 with the price of $27 per American depository share (ADS) saw its first closing price at $122.54. This translated to more than quadruples in its IPO price. On 21st March 2006 closing price was $49.40 compared to its highest price since IPO which was $153.98

Google (A 6 year-old dot com company) which was listed in NASDAQ (19th August 2004) with its IPO price of $85. On Tuesday, 21st March 2006 quote, its price was $339.92 compared to its all time high of $475.11. The pricing method of Google is a bit different. While most companies IPO price is set by their underwriters, Google used a Dutch auction to price the IPO. Such an auction lets potential buyers say what they're willing to pay and sets the price at the point where there are enough buyers to buy all the shares being offered. That's designed to make sure that sellers aren't settling for a way-below-market price and IPO buyers aren't getting a windfall.

Please bear in mind, investors are always look for the long term value appreciation, a short term price performance not necessary determined his investment judgment. It should be distinguished from the speculators. After all, speculators are looking for quick profit. To gain quick profit, there is no underlying business sense that determines its price movement. After all, as long as there are follies willing to pick up the stock at its sky rocket price, you are still gain. By investment judgment solely based on this merit doomed to be failed because you never know whether you are the last folly.
Should we change IPO from Initial Public Offering to Insiders Profit Only? Imaginative Profit Only? Or…..???

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