Ipos Can Quickly Lose Their Initial Charm
We noted with interest "The boom in IPOs" (Cover Story, Dec. 18), which recounted examples of wondrously successful initial public offerings of common stock. We would like to serve as wet blankets.
The issue for investors is whether those buying stock in these offerings actually do better than they would if they bought seasoned common stock, already public for several years. The answer: While in some cases they certainly do, in aggregate they do not.
You correctly noted that IPOs tend to jump in price during their first day of trading--and that stock bought after the initial jump tends not to be a good investment in the long run. But you also concluded, or at least suggested, that IPOs are good investments if bought before the jump. That is true only if you sell soon at the higher price. If you hold for five years, you will likely do worse than if you had bought seasoned stock. On average, you will still make a profit, but not as much as you would have in seasoned stocks.
Jonathan A. Shayne
Shayne & Co.
Larry D. Soderquist
Director of the Corporate &
Securities Law Institute