An Analysis of Performance of Selected Firms after Initial Public Offerings (Ipos)

By Chawla, Gurdeep K. | Journal of Business and Behavior Sciences, Spring 2016 | Go to article overview

An Analysis of Performance of Selected Firms after Initial Public Offerings (Ipos)


Chawla, Gurdeep K., Journal of Business and Behavior Sciences


INTRODUCTION

Many companies start their business as sole proprietorship where an individual uses his skills, ideas, and resources to be a successful entrepreneur. In other cases, some individuals come together and form a partnership organization to benefit from their collective skills and resources. The sole proprietorship and partnership forms of business can be easily formed, are subject to a few regulations, and do not have to pay corporate taxes. However, their business life might be limited (death or retirement of a sole proprietor or a partner can lead to dissolution of business), their liability is unlimited (owners' personal assets are at risk for business liabilities), and they have limited access to resources to take advantage of growth and expansion opportunities.

Sole proprietorships and partnerships may decide to form a public corporation and raise capital from public to support growth opportunities. A public corporation also has a very long business life because their securities are publicly traded and its ownership can be easily transferred. The owners' liability is also limited to the amount of investment made by the owners. In other words, personal assets of the business owners are not at risk for business liabilities.

A public company raises funds by issuing securities to the general public and is subject to the Securities Act of 1933 which created the Securities and Exchange Commission (SEC) to safeguard investors. Therefore, a sole proprietorship or a partnership has to meet SEC requirements and file reports before going public and raising funds from general public. The first issuance of securities is called IPO. IPOs are helpful in raising large sums to capital which can be used to undertake profitable projects. They also provide opportunities for the founders of the businesses to reap the benefits of their hard work and investments.

From the market perspective, IPOs have been beneficial to investment bankers who get the opportunities to use their expertise in helping companies to issue securities. Of course, they also earn revenues from fees and commissions, and might also be rewarded for the spread between the offer price and market price. The financial returns to investors are usually high especially during the first day of trading. There were 1,343 IPOs issued during 2001-2013 which provided an equally weighted average return of 13.3% and proceeds weighted average return on 12.2% on the first day. Also, there were $43.37 billion left on the table, lost capital for companies because of underpricing the IPOs, for an aggregate proceeds of $354.10 billion.

However, investors are also concerned about returns on their investments in long-term. Issuance of IPOs is usually considered to be a positive signal to the market in that the companies raise funds to invest in profitable projects which will boost companies' earnings and cash flows in future. Therefore, many IPOs perform well during the first day but the long-term performance depends upon the companies' selection of projects and whether they generate the expected earnings and cash flows.

This paper reviews some of the best and one of the worst IPOs of 2012 and analyzes the financial performance of companies from their initial offerings to 2014, or 2015 if the financial information is available. The best IPOs of 2012 have been selected from the Fortune magazine and their financial performance has been studied to evaluate if they continue to be good investment opportunities. Fortune magazine listed best and worst IPOs of 2012 in their December 26, 2012 edition and I selected the best IPOs from the listing which included Splunk, Protolabs, Guidewire, and Yelp. I also added Facebook because it was listed as one of the worst IPOs, it has been widely discussed, and appeared to be a good company to analyze for long-term opportunities.

I used the financial information provided by NASDAQ in their website to analyze the financial performance of the companies. …

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