The most anticipated day in the life of a company is its “liquidation event”, when the founders and/or investors cash out. Typically, a liquidation event takes the form of a buyout or what is known as an initial public offering (IPO.) This is when a company offers stock to the public for the first time. A successful IPO – like Google’s – generates millions or even billions of dollars which the company uses to further expand. Unfortunately, simply conducting an IPO does not guarantee success. Scores of companies have gone public despite a lack of profitability, having unsustainable business models, or by while being led by inept management. Others poured months or years of planning into their IPO only to forced to scrap it at the eleventh hour. Following are fifteen of the biggest such flops in recent history.
After propelling itself into the public eye with catchy TV jingles and endless advertising, Internet phone provider Vonage appeared primed and ready for a successful IPO. All seemed to be well at first, with the promising company raising $531 million on the first day. It was a short-lived triumph however, as ZD Net reported investors filing a class action lawsuit against Vonage when the company “lost about 30 percent of its value in its first seven days of trading.” The free fall began literally the first day of trading following the IPO, with MSNBC reporting that Vonage had 2006′s “worst first trading day” and announced that the firm “may never be profitable.” The ensuing fallout and struggles earned Vonage’s IPO a number 14 ranking on CNN’s “101 Dumbest Moments in Business.”
Webvan rose to prominence on an idea that was simply ahead of its time: home delivery of groceries. While the concept is now profitably offered by Stop & Shop’s Peapod and similar services, late 1990′s shoppers were not receptive enough to the idea to justify the $1 billion infrastructure Webvan built around it. So when the burgeoning company raised $375 million in its IPO, it was only a matter of time before Webvan was outstripped by its own frantic growth. As TheStandard.com reports in its 2001 article “Webvan’s Cupboard is Bare”, the company ultimately filed for bankruptcy, laying off some 2,000 employees and becoming yet another footnote in the annals of failed tech businesses.
Like so many ill-fated dot coms, eToys was an idea without demand: online toy sales. Despite lack of a true market, the company managed through sheer buzz and word of mouth to generate enough interest for a massive $166 million IPO in May 1999, according to Red Herring in their article, “EToys IPO Isn’t Child’s Play.” It was a rousing success by most standards, with eToys’ stock climbing to highs of $84 per share by October. But what goes up must come down, and in February 2001, the revenue-starved company’s stock tanked to nine cents per share. The only reason eToys is still technically alive today is because brick-and-mortar retailer KayBee scooped up its assets in bankruptcy court.
Pets.com was one of the most beloved of all late-90′s dot coms. Between the talking sock puppet and the hilarious Super Bowl commercials, it was tough not to like the ambitious young company, which raised $82.5 million in its February 2000 IPO. As many companies of that era learned, however, likability is not profitability. It didn’t help that the company spent $11.8 million on advertising to generate only $619,000 in revenue in 1999, according to the book. Think Inside The Box. But the main obstacle Pets.com failed to overcome was due to inconvenience: most people are not willing to wait several days for their pets’ food or meds to arrive. The company tried to sidestep this by offering discounted shipping and selling product below cost, but this only made orders even less profitable. It was this flawed business model that ultimately put Pets.com out of business just nine months after going public.
As the old business adage goes, nothing is final until the dotted line is signed. Tech boom startup Kozmo.com learned this lesson all too well when its planned IPO failed to materialize. The company’s business model focus on home delivery of impulse items – DVDs, snacks, or candy – which you could order and have delivered much like fast food. Regrettably, this was not a sustainable model, as BusinessPundit.com explains in its article “25 Internet Startups That Bombed Miserably.”
“The very thing that made it appealing – free, fast delivery – made the business model unsustainable. It was simply not possible to deliver items that cheap for free and still turn a profit.”
These problems conspired to drag Kozmo under in 2001, forcing the company to lay off its 2,000+ employees after burning through $280 million in venture capital.
Today’s “green” era has seen the rise of countless solar energy companies. Each new entry to the field believes (in spite of many failed predecessors) that it has found a way to make this stubborn technology profitable. A recent and telling example is China’s ReneSola, a manufacturer of cutting-edge solar wafers that filed for a $200 million IPO in January 2008, according to StreetInsider.com. Things haven’t worked out however, as the ReneSola saw its stock price drop 40% ($13.00 to $7.83) less than a year after going public. It is a fate all too common to solar tech companies, who are struggling as a category even more since the recession according to Reuters.
Some IPOs fail not because the company itself is unsound, but because of market-wide conditions inhospitable to going public. This appears to have been the case with ArcSight, a data security vendor that claimed to have, “…customers in the Fortune Top 5 of the aerospace and defense, energy and utilities, financial services, health care, high technology and telecommunications industries, and more than 20 major U.S. government agencies,” according to ZDNet. This wasn’t enough to rescue the company from a post-IPO fall however, as the New York Times notes in its article, “ArcSight I.P.O Fails to Thrill.” Despite raising $50 million ($25 million short of the planned $75 million), ArcSight’s stock closed down on its very first day of trading and went on to fall 33% by October 2008 in a, “…year that has dragged down many stocks in the tech sector.”
While some IPO flops take investors by surprise, others are predicted in advance. MAKO Surgical fell into the latter category before its 2008 IPO, with VentureBeat.com noting in February that:
“..the company now expects its shares to price between $10 and $11 apiece, down from an earlier range of $14 to $16. MAKO now stands to raise no more than $63.8 million, down from as much as $93.8 million under its previous expectation.”
This prediction proved prescient, as the maker of knee implants and robotic arms went on to make Fool.com‘s “5 IPOs That Failed You” list when its stock plummeted by 38%. VentureBeat concludes that this was to be expected given the troubled life sciences IPO market, which, it remarks, “wasn’t actually all that healthy to begin with.”
Despite being predicted by Fool.com to potentially, “…turn out to be some of the best stocks of the next 10 years”, that same website included ATA on its list of failed IPOs in 2008. The Chinese-based computer learning software vendor does not appear to have been mismanaged or flawed in any serious way. Rather, Fool noted that Chinese stocks were “currently out of favor” during 2008, when ATA’s stock lost 15% of its value after going public.
When it comes to IPOs, an apt saying might be, “…what the early forecasts giveth, the actual offering taketh away.” Such was the case with Cascal N.V., the British water company that saw its expectations of selling 16 million shares between $17-$19 apiece dissolve to 12 million shares at $12 each. Reuters, who noted that the offering was, “…priced at the bottom of a lowered forecast range”, reports that $144 million was raised in total. This wasn’t the end of the disappointment forever, as Fool reports that Cascal’s stock price dropped from $12 to $8.38 in 2008, good for a 30% drop in value.
Boise Cascade, Co.
Idaho-based wood products company Boise Cascade was a highly anticipated IPO, predicted to have a major impact in its industry. But as we have seen, IPOs do not always work out. A Wall Street Journal piece described the conditions that ultimately forced Boise to pull back and scrap what was to be a tremendous public offering:
“The Boise, Idaho, paper-and-wood products company’s decision to pull its $400 million offering late Wednesday marked the largest share cancellation since Worldspan Technologies yanked its $645 million offering in June 2004. Boise Cascade cited adverse market conditions as the impetus for pulling the deal. The company had struggled to price its 16 million shares earlier in the week, cutting the range $7 from its original projection of $24-$26 a share.”
The WSJ further speculated that the reason for Boise’s failed IPO was investor anticipation that the company would simply use the money to pay down debt, rather than to grow or enter new sectors of its market.
Private equity firm Blackstone sent waves through the financial markets with its IPO, described by InfectiousGreed‘s Paul Kedrosky as the sixth largest in US history. What virtually no one saw coming was the monstrous crash that followed, as Blackstone stock had fallen by half in March of 2008 culminating in what Kedrosky called “big headache for investors.” So far-reaching was this debacle that BreakingViews.com published a book, Blackstoned, in which, “…one of the most emblematic deals of the current financial crisis” is explored in great detail.
In 2006, Hertz learned that simply being a household name is no guarantee of a successful IPO. As the St. Petersburg Times reports:
“The reason is simple: Hertz Global Holding Inc.’s private-equity owners bought the chain just more than a year ago and piled huge debt on to the company’s books. They used the debt to lavish themselves with special payouts of about $1.4-billion as they flipped a hardly new-and-improved company back to the public market.
No wonder this IPO hit Wall Street with a loud thud. Investors, at least this time, refused to be sold a bill of goods.”
This is eerily similar to why Boise Cascade canceled its IPO entirely – investors simply will not (knowingly) fork over their cash for a debt-ridden company, no matter how well-known or historically strong it is. It was no surprise, then, that Hertz’s stock barely rose above its starting price of $15 per share on day one of trading and fared poorly for long thereafter.
We have already seen one company (Pets.com) whose television branding didn’t translate to IPO success. And in 2006, domain registrar giant GoDaddy.com proved an encore. In TechDirt‘s article “GoDaddy’s IPO Yanked Just As Quickly As Its Super Bowl Ad”, GoDaddy is quoted as citing “market conditions” for the reason it withdrew its $200 million IPO plans, regarded by Goliath as, “…only the latest tech IPO flop.” Linda Killian, manager of the IPO plus fund, was quoted at the time as saying “…even if they have a very good revenue outlook, business is good and margins are good, investors are just not interested in small technology companies.”
Failed IPOs don’t just dissapoint investors. If the situation is messy enough, lawsuits or even federal investigations can result. The latter occured in 2002 following the IPO flop of network device company Lantronix. According to CNN, “…the price and size of the IPO had been significantly reduced in the days before the IPO. Lantronix shares tumbled 20 percent from the offering price of $10 on its first day of trading.” The struggling company was soon acquired by DLJ, who recommended Lantronix stock to its investors on the same day of the acquisition. Unfortunately, the stock promptly plummeted to seventy cents a share, leading securities regulators to launch a full-fledged probe into the impromptu recommendation of this obviously troubled stock.