Categories Business

Companies, Conduct IPO Research Before Making An IPO!

Hey all you first timers! Thinking of making an IPO (I know making an IPO is your dream. But just wait; experienced commercial experts say that for your IPO to be successful, you need to set right certain factors that might influence your success. Before you venture just heed these points, otherwise you are going to experience high speed breakers in your path to success.

  • Win the trust of public: Have you ever wondered why someone should invest in your company? There are scores of companies in the market making initial public offerings (IPOs). How do you think you’re going to win over all of them? Obviously by winning the confidence of your potential investors that they’ll gain by investing in your company. Answer these basic questions:
    • How was your profitability graph in the last few years? Was it ascending, descending or parallel to the horizontal axis? Also were there more waves in your graphs? I mean more ups and downs? If you have a steady ascending profitability curve, then think of making an IPO, otherwise simply forget your dream for the present and attempt once more.

 

  • Did you have a successful business model? If you did go ahead, but otherwise hold your desire for sometime and set right your ailing business model first. I know investors to be very scrutinizing when it comes to the efficiency and long term survival of your business.
  • What impression does your management create on the public? Do they think your managerial human resources are efficient? If your answer is yes, then I’m giving you the green signal to proceed ahead. Otherwise first correct the flaw and then proceed further.

Dealing with the public is not easy as they are very aware and they have a lot of choices. It’s for you to clean up your system and make it impeccable. Never offer an IPO to draw money for purposes other than what it’s meant for. Here’s a list of dos and don’ts for you :

  • Never push an IPO to meet crisis: If you think you’re clever and your customers cannot make out any tricks you play on them, better watch out! See how Vonage, advertising and internet telephony providing company, has blundered by making such a silly attempt in June 2006. The shareholders who bought the company stocks prior to its public offer filed a lawsuit against the company for wrongly motivating general  public into buying their shares as the company was losing money and the IPO was a strategy to overcome the problem. The lawsuit alleges that institutional investors who were aware of the decline of the company would be reluctant to buy the shares and hence the offer was made to the public. You can go through a detailed report of this at ZDNet.
  • Don’t make an IPO in anticipation of success: Assess the market pulse for your consumer response before you start expanding your business and don’t make an IPO in anticipation of success, if the response is not all that encouraging. Try to make an accurate market forecast before you make investments. Take the example of revolutionary online grocers Webvan, who had to close down as it was not able to meet the financial challenges of its own rapid progress. The $ 375 million that it raised flopped. Read the detailed report at The Industry Standard.
  • Never offer IPO on a fake a market: Assess your market worth accurately and then announce your IPO. Don’t create a false demand by using publicity tactics and win investors. eToys is one such company. An online toys selling store, it really never had any market. It created an impression of high demand through word of mouth that generated a huge IPO of $ 166 million. But the idea flopped shortly as it had no real market. You can read about it in the Red Herring report.
  • A flawed business model can ruin your business: Correct all lacunae in your business operations if you want a successful business. Pets.com, the online pet store was a favorite with many people but the company realized that that did not help in bringing back huge profits. The main reason for its failure was delayed delivery of pet food and medicines. Though it tried to make up for this operational defect in other ways, by giving discounts etc. it did not help in roping in enough customers. The business was almost closed before it raised $ 82.5 million on IPOs. Get a detailed picture of the Pets.com failure here.  Another gaping example of a flawed business model is that of Kozmo which could not run the show as keeping up with the promise of delivering consumer items like DVDs, snacks etc. at a cheap rate for free. The company ran out of profits and succumbed to the losses. Its planned IPO never materialized. You can read about the Kozmo downfall here
  • New technologies are not always profitable: Nowadays, a lot of new technologies are coming in the market claiming to be the best to harness natural resources. But after the initial boom, they just fade out. Take China’s ReneSola for example. Its solar wafers created a sensation in the market and generated an IPO of $200 million. But the stock prices for this company dropped before a year of the IPO launch. You can read about the ReneSola failure at Street Insider.
  • Unattractive IPO’s are not profitable: Your company may be efficient. But when you need to sell an IPO, it should be able to attract public from the market. The target public should also be willing to invest. It’s not always the fault of the company offering the IPO if the public is not receptive. Take the case of ArcSight which no doubt raised a $50 million IPO which is less by $ 25 million than the planned IPO but it had to wind up immediately. Here’s a report on ArcSight .
  • Investments not made in low predicted IPOs: Financial updates on some companies predict the rise or fall in the expected IPO amount depending upon the value of the share prices. Investors always go through these reports to make an assessment of their profitability in investing in a particular company. Mako Surgical is a company that lost out to the negative predictions made by financial reports. You can read about it at Ventura Beat .
  • Low demand for category products: It’s not that always a company is at fault if it fails in the market. It might be just that its products or services may not be having any demand because they belong to a specific category. Take ATA for instance. The company was expected to flourish, but because Chinese products were out of the market in general, the company had to suffer. You can visit The Motley Fool for a detailed review.
  • Actual forecasts fall continually from the predicted forecasts: Some companies start with high share prices which continually fall over a period of time. This results in failed IPOs. British water company Cascal N.V expected to sell 16 million shares at a price of $17-$19 but actually sold them at $12. Later it dropped further down to $8. You can visit The Motley Fool for a detailed report.
  • Investor Expectations and Adverse Market Conditions: The Boise Idaho, was one of the companies with a good IPO. But it had to withdraw its IPOs due to adverse market conditions and investor expectations. The investors suspected this paper and wood products manufacturing company for using the money collected through IPOs for paying back debts rather than for the growth of the company. You can go through the Boise Idaho report here.
  • Just a good name wont do: Good reputation can help in attracting investors to a certain extent, but the company records are more important. If a company is in bad form, no investor will invest even if the company has a good reputation. Take Hertz Global Holding Inc. for example, though it had a good reputation, investors did not want to risk their money on a company drowned in debts. Hertz hardly saw any growth from its $15 per share price. You can read about the Hertz report here.
  • Small technology companies don’t attract investors: Even if the profit margins are good and the business is without flaws, small technology companies fail to attract investor attention. GoDaddy.com is one such. You can check out the story of GoDaddy here.

Now since you’re aware of the different types of pitfalls for your company, don’t venture into it without checking out with these conditions. Set them right and carefully predict the course your IPO’s going to take before making that offer.

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