An initial public offering (IPO) is often described as a company's "coming out party." It's the moment when a successful, privately held business says, "Hey, world! Who wants a piece of the action?" If all goes well, investors scramble to buy the freshly minted stock, lifting the price through the roof and making lots of people happy -- by which we mean filthy rich -- in the process.
Then again, you can't really predict a party's outcome. What if nobody shows up? What if the caterer sneezes on the shrimp cocktail? What if the Jimmy Buffett cover band turns out to be the real Jimmy Buffett?
The same is true for IPOs. Sure, an IPO can bring an instant flood of capital, but it can also mean opening your company to greater public scrutiny, cranky shareholders and fickle market forces. For the following companies, their long-awaited IPOs proved to be DOA.
Read on to learn more about the 10 biggest IPO flops of all time.
Launched in 1995, TheGlobe.com was one of the first big social media Web sites, places where members around the world could create, customize and share their own content.
In 1998, at the "anything goes" peak of the Internet boom, TheGlobe.com founders floated the idea of going public, but then retreated, citing reports of a sagging online advertising market and a cooling of investor interest [source: Kawamoto]. A month later, they decided to go for it anyway, a decision that paid off handsomely -- at first.
But the party didn't last. The darling of the IPO world soon became the poster child for the dot-com implosion [source: Shim]. When the bottom fell out of the online advertising market in 2000, TheGlobe.com scrambled to find new backers and an alternative business model. By 2001, it had cut half its workforce and sold its major Web properties.
Today, TheGlobe.com is just a single page of text recounting the classic Silicon Valley saga of boom, bust, try to crawl back -- and then die.
In China, Shanda Games is synonymous with the hugely popular online gaming market. A division of Shanda Interactive Entertainment, the company produces the multi-player online role-playing game "Legend of Mir" and manages the Chinese version of the online fantasy hit "Aion" [source: Reuters].
Following in the footsteps of other Chinese companies, Shanda planned a big coming out party with a U.S. IPO in September 2009. The company snagged the catchy ticker symbol (GAME) and hired heavy hitting underwriters JP Morgan and Goldman Sachs to set the IPO price and determine the number of shares to offer.
Feeling the time was ripe for a big payday, the underwriters bumped up the total number of shared from 63 million to 83.5 million at the last second [source: Petruno]. Then they set the opening share price at $12.50, the very highest end of the pricing spectrum.
The result appeared to be a bonanza, raising a total of $1.04 billion, the largest American IPO of 2009 to date.
Unfortunately, it turned out that the underwriters had gotten greedy [source: Petruno]. By pushing the price to the limit, they sucked up all of the investors willing to pay top dollar. With no new investors left to prop up the price, the stock took a huge and immediate loss of 14 percent, finishing the next day down $1.75, one of the worst IPO debuts of the year.
Back in 2006, the Internet telephony company Vonage ruled more than half the North American Voice over Internet Protocol (VoIP) market [source: Kharif]. But marketing and managing all of those online phone lines turned out to be quite expensive and Vonage was losing money every quarter -- lots of money. From its founding in 2001 until February 2006, the company had lost $310 million [source: Kharif].
Meanwhile, major telecommunications and cable companies were gearing up to offer VoIP products of their own, representing the first real threat to Vonage's dominance. To raise some much-needed cash, Vonage execs decided to go public on May 24, 2006, offering shares at $17 a pop. On the surface, it looked like a success, raising $531 million in quick capital [source: Reardon].
But this wasn't your normal IPO. Usually, IPO shares are shopped around to investment firms and individual big-ticket investors who do business with the underwriter. Vonage took the unusual tactic of offering 13.5 percent of its IPO shares directly to Vonage customers, who could buy the shares online through a special Web site created by the underwriting firms [source: Reardon].
In an ironic twist, the high-tech company was undone by a technical snafu. When excited Vonage customers tried to buy stock online, many were told that the purchases didn't go through. Then, a few days later, after the stock price had dropped considerably -- it lost 30 percent in the first week alone -- the customers were told that their purchases had gone through and that they owed the original stock price of $17 a share. Oops.
The angry customers won a class action suit against the underwriters, which came to roughly $800,000 in fines and restitution [source: Shwiff]. The botched IPO inspired a second lawsuit against Vonage for misleading investors [source: Reardon]. All in all, this wasn't the smoothest coming out party for Vonage.
Few dot-com flameouts were as public and well-publicized as Pets.com. Pets.com was one of four (yes, four) online pet stores that arose during the Internet boom of the late 1990s. Pets.com made its name through a witty advertising campaign featuring an exuberant stoner-dude sock puppet and the slogan, "Pets.com. Because pets can't drive." The sock puppet was so popular it was turned into a balloon for the 1999 Macy's Thanksgiving Day Parade.
Blind to the fact that pet supplies made for lousy online sales (imagine the shipping costs on a 50-pound bag of dog food), Pets.com attracted big-name investors like Amazon.com, which came to own a 30 percent stake in the San Francisco-based company.
Pets.com had its IPO in 2000 and raised an impressive $82 million, but that wasn't anywhere near enough to make up for a leaky business plan. The stock went from a high of $14 per share at the IPO to a low of 22 cents a share [source: Wolverton]. In the end, the company tried selling sock puppet replicas and memorabilia, but even their famous mascot couldn't save them.
Only nine months after its IPO, Pets.com went to doggy heaven. However, the sock puppet lives on in commercials for car loan company Bar None, Inc.
The original new media company, Wired Ventures began with a mission to chronicle the emerging information economy from its insider's perch in San Francisco, beating the brick-and-mortar media establishment to the important, underground stories.
Built around the award-winning reporting and design of its print magazine Wired, the company grew to include HotWired and Wired News, which became the online arms of the magazine, book publishing company HardWired and an MSNBC show called Netizen.
Although the original 1993 business plan projected a lean staff of 22, Wired Ventures bulged to 338 employees by 1996 and was losing nearly $8 million a year [source: Useem]. Even though it was hemorrhaging money from each of its ventures, Wired believed it was riding the same unstoppable wave as the rest of the high-tech industry.
Company execs came to their senses and called off the IPO when Internet stocks took a sudden, although temporary dip. The founders would try and fail with another IPO in 1998 before the company was wrested from them in a hostile takeover and sold to Advance Magazine Publishers, Inc., parent company of Condé Nast, in 1998 [source: PR Newswire].
Webvan.com was almost too good to be true. Customers in seven major U.S. cities could sit at their computers, order a large (or small) amount of groceries and have them delivered to their door in 30 minutes or less. For city folks, who were sick and tired of struggling to find parking or lugging overstuffed grocery bags on overstuffed buses, Webvan was a godsend.
Unfortunately, it was also a financial pipe dream.
Launched in 1997, Webvan went public in 1999 and raised $375 million in the process. Yet even with this cash -- plus an incredible $1 billion from private investment firms like Sequoia Capital -- the company couldn't become profitable [source: Himelstein].
Analysts blame several factors for Webvan's demise, not the least of which was the great expense of building its gee-whiz automated warehouse infrastructure. Each 300,000-square-foot distribution center cost $25 million to build and employed 16 people (and a thousand servers) just to handle the back-end technology [source: Himelstein]. It ended up costing the company $27 per order just for processing and delivery. And with an average order amount of around $80, that meant continual losses [source: Mullins].
In a last ditch effort to save money, Webvan.com drastically cut the variety of products it offered on the site, which alienated loyal customers and brought sales to a screeching halt -- just in time to declare bankruptcy in 2001, a mere 18 months after its triumphant IPO.
At the height of its awesomeness, Kozmo.com made you believe that the Internet would indeed solve all of our problems. Kozmo was a movie rental and snack delivery service operating in 10 U.S. cities with the ridiculously beautiful promise of delivering your DVD and munchies in less than an hour with no minimum purchase -- and no tipping!
If you didn't live through the heady dot-com era, it's hard to understand how a company like this ever thought it would make a dime. Private investors even shelled out $280 million to help fuel its rapid growth -- and its armada of Day-Glo orange delivery scooters [source: German].
Kozmo filed plans for an IPO with the SEC in March 2000, but had to back down when the market began its slippery descent. The same day that Kozmo announced the postponement of its IPO, it laid off 24 employees, representing the first wave of massive layoffs that would eventually decimate the company, which at its height employed over 2,000 people [source: Sandoval].
Kozmo tried to save itself by requiring a minimum order of $10 (because each delivery cost them $10), but even that couldn't save it. Like Webvan, Kozmo proved that popularity and a huge and loyal following doesn't always lead to profitability.
Like Pets.com and Wired Ventures, eToys.com was a late-90s juggernaut that suffered from a wicked case of Internet-age hubris. eToys, an online purveyor of -- you guessed it -- toys, dismissed brick-and-mortar competitors like Toys 'R Us as stodgy and slow to adapt to the online marketplace.
The eToys website was loaded with features like in-depth toy reviews, recommendations sorted by age, parenting and baby advice columns and e-mail newsletters. And their TV commercials, featuring Israel "Brother Iz" Kamakawiwo'ole's now-famous rendition of "Somewhere over the Rainbow," helped solidify the brand.
Unfortunately, eToys.com fell victim to some of the same logistics problems that plagued Webvan and Kozmo. eToys had to build a massive and hugely expensive infrastructure from the ground up to be able to stock and deliver such a wide variety of toys to so many people.
Riding the wave of dot-com IPOs, eToys went public in May 1999 at $20 a share and skyrocketed to $76 a share on its opening day [source: Cotriss]. But it took a huge public relations hit that same Christmas, when a bunch of orders failed to arrive by Christmas morning. In response, it built two more huge warehouses to deal with an expected increase in demand in 2000, which never materialized [source: Cotriss].
Toys 'R Us -- who partnered with Amazon.com in 2000 -- had the last laugh when eToys filed for bankruptcy in 2001.
The Blackstone Group
Steve Schwarzman, co-founder and CEO of the Blackstone Group, is the kind of oversized billionaire spendthrift that only Hollywood -- or in this case, Wall Street -- could create. For his 60th birthday party, the so-called "King of Wall Street" threw himself multi-million dollar bash starring Martin Short, Rod Stewart and Patti LaBelle leading an entire church choir singing "He's Got the Whole World in His Hands" [source: Gross].
Blackstone is a private equity firm specializing in leveraged buyouts (LBO), or hostile takeovers. Schwarzman and his business partner Peter G. Peterson have been buying and flipping struggling companies since the 1980s with the help of lots of cheap, available debt. The typical LBO purchase is 10 percent cash and 90 percent debt.
Private equity firms are notoriously… well, private. So it surprised many investors when Blackstone announced plans to go public in 2007. Unfortunately, in the rush to get a piece of this Wall Street wonder -- Blackstone's funds have averaged a 23 percent annual return since 1987, twice the S&P 500 average -- investors overlooked the odd details of the deal [source: Jubak].
First of all, the company being offered was a spinoff of the Blackstone Group called Blackstone Holdings. This spinoff didn't represent the vast earnings of Blackstone's investments, only the chunk of the company that managed those investments. Blackstone Holdings only took in $2.3 billion a year in fees, but the IPO underwriters still valued it at $40 billion [source: Jubak].
But the biggest problem -- and something that Schwarzman and his Blackstone insiders undoubtedly foresaw -- was that the bottom was about to drop out of the credit market, drying up the easy debt needed to make LBOs. In the IPO prospectus, Blackstone warned of uneven earnings over the next couple of months or years, but few people paid attention.
The result: Blackstone raised $4.1 billion with the IPO, Schwarzman and his co-founder Peter G. Peterson pocketed $2.6 billion, and investors ended up with a stock that lost 42 percent of its value during its first year [source: Kelly]. More than two years later, the stock is still trading between $10 and $15, less than half of its $31 IPO price.
Seattle-based biotechnology firm Omeros holds the dubious distinction of having the worst IPO flop of 2009.
The company is in stage III trials for a drug that claims to improve joint function and ease pain after arthroscopic knee surgery [source: Reuters]. Executives were hoping that a cash infusion from the IPO would carry them through until the drug gets approval from the Food and Drug Administration (FDA).
Omeros went public on October 7, 2009 and raised $62 million on a share price of $10. Unfortunately, of the 42 companies that went public this year, Omeros' stock plunged the farthest the fastest in the weeks following its IPO [source: Timmerman]. As of November 2009, the stock price is down 42 percent [source: Yahoo IPO].
Omeros' disappointing post-IPO performance has dashed the hopes of other biotech companies, which are scrambling for cash in a market spooked by the uncertainty surrounding the health care debate in Congress.
It didn't help matters that right before the scheduled IPO, in which Omeros originally hoped to raise $80 million, an ousted chief executive accused the company of fudging timekeeping records for National Institutes of Health (NIH) grants [source: Timmerman].
For lots more information on IPOs, investment woes and the miraculous mess we call the stock market, take a look at the links on the next page.
During volatile periods in stock markets, exchanges will often employ 'circuit breakers' to keep stock prices from falling too far too fast.
- Cotriss, David. "Where are they now: eToys.com" The Industry Standard. May 9, 2008.http://www.thestandard.com/news/2008/05/29/where-are-they-now-etoys-com
- German, Kent. "Top 10 dot-com flops." CNET.http://www.cnet.com/1990-11136_1-6278387-1.html
- Gross, Daniel. "The Golden Ass." Slate. June 19, 2007.http://www.slate.com/id/2168650/
- Himelstein, Linda. "Webvan left the basics on the shelf." BusinessWeek. July 23, 2001.http://www.businessweek.com/magazine/content/01_30/b3742060.htm
- Jubak, Jim. "Blackstone IPO is a must-miss." TheStreet.com. April 4, 2007.http://www.thestreet.com/story/10348377/1/blackstone-ipo-is-a-must-miss.html
- Kawamoto, Dawn. "TheGlobe.com's IPO one for the books." CNET News. November 13, 1998.http://news.cnet.com/2100-1023-217913.html
- Kelly, Jason and Keehner, Jonathan. "Schwarzman's 'Perfectly Timed' IPO means Long Wait for Holders." Bloomberg News. June 28, 2008.http://www.bloomberg.com/apps/news?pid=20601087&sid=ab1Xeq8UM0PA&dbk
- Kharif, Olga. "Vonage's Iffy IPO." BusinessWeek. February 9, 2006.http://www.businessweek.com/technology/content/feb2006/tc20060209_519496.htm
- Mullins, John. The New Business Road Test. "Webvan's unsustainable business model." London Business School. August 2007.http://www.venturenavigator.co.uk/content/webvan_case_study
- Petruno, Tom. "China's Shanda Games IPO flops after investors pay up." Los Angeles Times. September 25, 2009.http://latimesblogs.latimes.com/money_co/2009/09/shanda-games-ipo-shanda-interactive.html
- PR Newswire. "Wired Ventures to sell its magazine." May 8, 1998.http://www.encyclopedia.com/doc/1G1-20572747.html
- Reardon, Marguerite. "Investors sue Vonage over IPO." ZDNet. June 5, 2006.http://news.zdnet.com/2100-1035_22-148306.html
- Reuters. "Biotech Takes It on the Chin in October." November 2, 2009.http://www.reuters.com/article/pressRelease/idUS162014+02-Nov-2009+PRN20091102
- Reuters. "Shanda says its revenue growth to outpace industry." Novmber 2, 2009.http://www.reuters.com/article/americasIpoNews/idUSSHA12631720091102
- Sandoval, Greg. "Kozmo postpones IPO, lays off 24 employees." CNET News. June 19, 2000.http://news.cnet.com/Kozmo-postpones-IPO,-lays-off-24-employees/2100-1017_3-242111.html
- Shim, Richard. "TheGlobe.com to cut staff, fold sites." CNET News. August 3, 2001.http://news.cnet.com/2100-1023-271110.html
- Shwiff, Kathy. "Citi, UBS, Deutsche Fined Over Vonage IPO." The Wall Street Journal. September 24, 2009.http://online.wsj.com/article/SB125363508003831103.html
- TheGlobe.com. "About Us"http://www.theglobe.com
- Timmerman, Luke. "Omeros, Worst Performing IPO of 2009, Casts Shadow Over Other Aspiring Biotechs." Xconomy. October 27, 2009.http://www.xconomy.com/seattle/2009/10/27/omeros-worst-performing-ipo-of-2009-casts-shadow-over-other-aspiring-biotechs/
- Useem, Jerry. "All Dressed Up and No IPO." Inc. February 1, 1998.http://www.inc.com/magazine/19980201/867_pagen_2.html
- Wolverton, Troy. "Pets.com latest high-profile dot-com disaster." CNET News. November 7, 2000.http://news.cnet.com/2100-1017-248230.html
- Yahoo! Finance. "IPO Performers"http://biz.yahoo.com/ipo/perf_l12.html