MakovskyFriday, May 22, 2015
Star performers in the IPO market make headlines. Recently, Aduro Biotech (Nasdaq: ADRO), after increasing and pricing its deal above range, opened 15 points higher than the $17.00 offering price. Etsy (Nasdaq: ETSY), an online marketplace, also doubled minutes after opening. The deal priced at the high-end of the range, $16.00, and opened 94% higher with a $31.00 first trade. There have been others such as Spark Therapeutics, a biotech company, and Shake Shack, a fast casual restaurant chain, whose IPOs have produced outsized gains in their debuts.
However, there is another category of IPO, which attracts far less attention. These are the so-called “broken IPOs.” A broken IPO is defined as one in which the shares fall below the opening price. For example, Black Stone Minerals LP, an owner of oil and natural gas mineral interests, priced its shares at $19, the low end of the expected range. Its shares are currently trading below the initial offering price.
What causes a broken IPO? Lack of investor interest and an unsustainable business model are some of the reasons. Another reason could be that the market was misjudged by the company’s underwriters as was the case with the Facebook offering a few years ago in which the bankers priced the offering at $38; the shares of the social media company traded down shortly after the offering. For their part, underwriters obviously look to avoid broken IPOs, as they are embarrassing for themselves and their clients. Typically, underwriters look to price shares at an amount that will result in a small “pop” on the first day of trading, executing great care to avoid pricing the shares too high to avoid the risk of a broken IPO.
Broken IPOs can be fixed; however, it takes work. Some steps to consider:
Assess “the Street’s” point-of-view. The management team of a broken IPO needs to understand what went wrong. Following the “quiet period” the company’s investor relations team and external advisor should conduct interviews with institutional investors who purchased shares of the offering as well as those who did not to understand their decisions. Issues of interest: management experience, debt levels, use-of-proceeds, corporate strategy, competitive position, among others.
Formulate appropriate investor messages. Based upon the information obtained from the step outlined above, management can set about formulating appropriate investor messages and addressing misconceptions that may have emerged during the course of the investor interviews.
Take your case to the media. Utilize the financial media to highlight your investor messages and clarify misconceptions about the company. Media interviews should be scheduled around key corporate developments and quarterly earnings reports to reinforce key messages.
Conduct outreach to investors. Your company will most likely be covered by the analysts at the firms that brought it public; however, your investor relations team should be marketing the company to non-deal analysts as well as institutional investors who declined to participate in the IPO. Often a broken IPO can present an attractive buying opportunity for a value-oriented investor.