Some of the most well-known IPOs of the last decade include Facebook, Twitter, Snapchat and Alibaba. The first three are typical IT unicorns that were in the red on the day of their IPOs – and to a certain extent are still unprofitable to this day – but still had a market value prior to their IPO of over one billion dollars. However, early investors in Facebook will have profited, provided they did not sell their shares the first time the share price dropped. Yet, the situation with Twitter and Snapchat has been less favourable up to now. The shares of both companies remain below the offering price at their IPOs.
IPOs as an opportunity for investors
IPOs can be highly lucrative for investors. For example, when LinkedIn went public in May 2011, the share price rocketed from 45 dollars to over 94 dollars on the first day of trading. Five years later, Microsoft took over the company at a share price of nearly 200 dollars. But there have also been mediocre or failed IPOs. When Twitter went public in November 2013, the share price increased by over 70% to nearly 45 dollars on the first day of trading. Today, the company is listed at around 40 dollars, significantly below the closing price on the first day of trading.
Alibaba smashes all records
At the time of its IPO, online retailer Alibaba already had a market share of 80% in its home market of China. Demand for its shares was huge. Due to the sheer volume of buy orders, the New York Stock Exchange (NYSE) took nearly two and a half hours to set an initial price. The original planned opening price per share was 68 dollars. On the day of the IPO, the price rose to nearly 100 dollars. At a total volume of 25 billion dollars, the Alibaba IPO is the biggest in history. Since the IPO in August 2014, its shares have doubled in value. So both unicorns and established companies can be highly attractive for investors.
Globally, companies are currently holding back from initial public offerings. According to global consulting firm Ernst & Young, IPO issue volumes in the first quarter of 2019 fell to 13.1 billion dollars; a reduction of almost three quarters compared to the previous year. But there are still some interesting options in Switzerland this year.
Which recent IPOs have proved attractive to investors?
Swiss railway company Stadler Rail went public on 12 April 2019. Interest in its shares was huge. Demand exceeded supply. The shares were placed mostly with institutional investors such as pension funds, insurers and investment funds. Many private investors came away empty-handed.
But this does not have to be a drawback. In many cases, the run-up to a widely publicized IPO can lead to sometimes exaggerated expectations regarding a share's potential – driving up the price in advance of the IPO. The price often goes through a corrective period in subsequent months, creating an attractive window of opportunity for a private investor. This was recently the case for the Sensirion IPO: in the initial months following the IPO, its shares increased significantly in value. Today, however, the shares are listed at their original issue price.
As an investor, what do I need to be aware of?
For any type of investment, detailed information on the investment is vital. In the event of an initial public offering (IPO), it is advisable to obtain the prospectus and the preliminary information, provided that the company in question makes it available in advance to private investors.
For an IPO, you should consider the following points in particular:
- Subscription period: the subscription period for an IPO describes a period defined by the issuing company within which shares can be subscribed at a defined price (issue price). In another context, this term can also refer to the issuing of bonds.
- Pricing method: the issue price can be defined in different ways. For the sake of simplicity, we distinguish between two different approaches. The simplest method is the fixed price procedure. Here, the issuing company defines a fixed price at which shares can be subscribed during the subscription period. The most widespread method is the book building process. This is a type of auction in which interested investors place bids for a certain number of shares within the subscription period. The issuing company then decides to which investors it awards the shares.
- Partner bank: if you wish to purchase the securities of a company before it is traded publicly on the stock exchange, you can organize this via your bank.
- Free float: an important factor when assessing the attractiveness of an IPO is the free float. This describes the portion of the total share capital of a company that can be freely traded on the stock exchange. For some IPOs, only a portion of the share capital is offered for subscription. This enables major shareholders to consolidate their influence within the company and more easily implement their interests at a General Meeting. Depending on the attitudes of these major shareholders, this can represent a risk or an opportunity for private investors. The Stadler Rail IPO is an example where around 40% of the shares were offered.