Everyone, or most everyone, loves initial public offerings and the allure of great gains on the great growth engines of the next decade. Sometimes things just don’t work out as well as the hype and the hope. That is the market for you. But then there is a different scenario where the underwriters misprice an IPO by a mile. These either dupe the companies which are coming public or they hose investors who buy in the public market at the IPO or in the post-IPO public markets. It actually happens a lot in good markets and in bad markets.
2011 has seen its fair share of poorly priced IPOs. 24/7 Wall St. took a look at the entire IPO class of 2011 and looked through to see which IPOs were greatly mispriced. The most obvious were in the following: Arcos Dorados Holdings Inc. (NYSE: ARCO); Boingo Wireless, Inc. (NASDAQ: WIFI); Demand Media, Inc. (NYSE: DMD); Epocrates, Inc. (NASDAQ: EPOC); Freescale Semiconductor Inc. (NYSE: FSL); FriendFinder Networks Inc. (NASDAQ: FFN); HCA Inc. (NYSE: HCA); Kips Bay Medical, Inc. (NASDAQ: KIPS); LinkedIn Corporation (NYSE: LNKD); NetQin Mobile Inc. (NYSE: NQ); Pandora Media Inc. (NYSE: P); Renren Inc. (NYSE: RENN); and Skullcandy, Inc. (NASDAQ: SKUL).
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Some of the mispricing will appear to be the weak stock market. These mispriced issues go above and beyond the stock market performance. We took a look at the underwriters, the pricing around the pre-IPO ranges, the float, the valuation then and now, and more. In many cases, we even noted what the analyst group thinks of these outfits today with consensus price targets from Thomson Reuters.
Arcos Dorados Holdings Inc. (NYSE: ARCO) is the Latin American operator of McDonald’s. The offering was 73.5 million shares, 11 million higher than expected at $17.00 per share, above the $13 to $15 price range. This one was rather simple to observe: the raised shares and the raised price just didn’t get raised enough. Unlike the bulk of the mispriced IPOs, “The Latin Golden Arches” had money left on the table. The Chairman and CEO controls the company with a super-majority stake, but he even bought shares in the IPO. It came public in April and it did not get killed May and did not get killed in the July-August market panic.
Bank of America Merrill Lynch, J.P. Morgan, Morgan Stanley and the others left money on the table here for the company. It seemed as though a $20.00 offering could have been easily supported even at the higher share count. To prove the point, the post-IPO range is $19.70 to $29.43 and that sub-$20 price was only on one day in July. This IPO had very little hype going into it when you consider what you get: McDonald’s growth versus Latin American population growth. This last week has been the only real drop with major emerging market selling or the gains would even be more. Investors may be getting a chance to get back in on the cheap.
Boingo Wireless, Inc. (NASDAQ: WIFI) was in the pre-selling waves before the summer, but its hotspot model is not as hot when you consider how so many smartphones and subscriber services are doing the company’s job. We actually have no issues with the company’s business model, but the issue is on how it is valued. After selling 5.77 million shares at $13.50 per share on May 4, the opening price was about 7% lower and it closed down almost 10% on the first day. It never saw that price again and by May 16 this was under $10.00.
Earnings were a disappointment in June, something we think the company or the underwriters should have known at the IPO when the price range was $12 to $14 per share. Credit Suisse and Deutsche Bank were the joint book-runners on the deal and this stock is now down close to $8.00 after trading under $7.00. Should a questionable IPO price even be valued now at close to 60-times 2011 expected earnings? Nothing wrong with the company, but a lot wrong with how it was priced.