I just sort of had an epiphany this morning. Most of the IPOs we have witnessed in the last 10 years are probably a big con game on the little guys. A private company comes up trying to do an IPO. The investors ask what is in it for me. The company management will tell you that the stock will go up and up. Nobody will buy the IPO if it goes down, of course. But what is in the company if the stock goes up and up? Why not just retain the stock since the value is going to go up? Why give the investors this opportunity to get rich? The company will answer that we need to unlock the value of this company which has been undervalued before. Now this is a bilateral monopoly situation just like the "Spanish Prisoner". The value is imprisoned in this private corporation format. Only by going public, this value can be freed. But the reality is that there is not that much value to be freed for most of these companies. The company management/owner only want to get some cash, instead of some so called salary and bonuses. One prominent example to my mind is Blackstone, the last great IPO of Wall Street.

-- XinpingZhu - 18 Feb 2009

  • This is most likely to be true about the financial services houses and investment banks. If Goldman Sach's, or Blackstone's, partners thought the business was worth more than the public would pay for it, they would continue to own it. If they thought the public would only pay for it what it was worth, why lose control by selling it? It would only make sense to sell their partnership to the public if they thought the public was willing to pay so much more for it than it was worth that they would get a vast premium in return for losing control. And of course, they didn't need to sell control in order to raise money: if they were able to leverage their proprietary trading at 30:1, they were having no trouble borrowing.

-- EbenMoglen - 18 Feb 2009

It is also striking how IPOs also coincide with society's desire to separate our projections from reality. In theory, any sophisticated institutional investor (assuming - perhaps wrongly - that he/she is virtuous and wants to increase the value of his clients' portfolios) or individual investor with any business acumen would be able to see the inherent irrationality behind an IPO that Professor Moglen illustrates. Furthermore, I recall that there was much talk that Blackstone's IPO would mark the end of easy credit (and demise of Blackstone's business model) for precisely the same reason - if Blackstone could keep performing LBOs/investing so easily and earn enormous profits, why would it relinquish its power over this niche to the general public? However, especially during a bull/bubble market, IPOs are dramatized as the best investment - a chance to strike gold early. The result is all too clear now.

  • Just for the record, Blackstone's stock never surpassed its IPO price of $35 in July of 2007. It is currently at $4.23.

Many investors deluded themselves and believed that being able to tap into the private equity world was a once-in-a-lifetime opportunity. I guess we have seen the harsh results when our illusions come crashing down to meet reality (perhaps analogous to a Law and Order fan stepping onto Rikers Island?).

Note: An alternative reason for investing in Blackstone might have been to engage in one's own con game - buying a stock in hopes of simply selling it at a higher price to another person with no regard to the company's value (the "most prevalent form of primitive Ponzi" as Leff said). But even so, some "fundamentals" investors were probably also involved and deluded themselves.

-- KeithEdelman - 18 Feb 2009