When the world’s largest oil firm, recently attacked by drones and owned by a government associated with murder, offers company shares at a premium — what could possibly go wrong?
There's no reason to worry — if you trust investor excitement over Saudi Arabian Oil Company (known as Saudi Aramco) planning to go public soon. The financial narrative sounds too promising: famous brand, huge player, government security, big dividend. In a time when central banks massively buy into markets and storing money will actually cost you, you may see why.
But the fact is: a lot can go wrong at stockmarket debuts (the IPO or initial public offering). In fact, famous investor Warren Buffet stays away from IPOs entirely and has called them a "stupid game". Let's look at three previous record breaking IPOs, and how they failed:
1. Softbank, 2018, telecommunication sector, Tokyo Stock Exchange
'My own investment judgment was really bad.' Softbank CEO Masayoshi Son said about SoftBank's involvement in WeWork
The CEO's ambitious plan to take Japan's telecom No. 3 out of the crowded home market didn't quite work as planned. Masayoshi Son wanted to invest into more promising startup technology around the world via the Vision Fund. Name sounds familiar? It's a controversial investment vehicle partly funded by Saudi Arabia's foreign wealth fund involved in such cash-burnng operations as Uber and the recent IPO failure WeWork the fund bailed out to save its investment.
SoftBank's own IPO was also ill-fated. It attracted investors with a promise of a 5% dividend payout in a negative interest rate environment. Finally it raised $23.5 billion (€21.2 billion), the second-largest IPO ever. But when the market opened on day one, shares tumbled 14.5% on the Tokyo Stock Exchange, one of Japan's worst ever IPOs. About $9 billion were lost on this day.
What happened? The initial pricing was agressive, valuing SoftBank higher than its larger rival NTT DoCoMo and was already considered overpriced. Then, shortly before the IPO,SoftBank considered removing hardware provider Huawei from its network infrastructure over espionage and cyberattack concerns. Using more expensive parts from Nokia or Ericsson would mean higher costs in the future. A massive service outage just prior to the IPO didn't exactly give investors faith in the company. So many sold right away when they had the first chance before risking to lose money on the bet.
2. Alibaba, 2014, e-commerce, New York Stock Exchange
Timing was crucial for Alibaba: The IPO was delayed several times in unfavorable conditions and was finally considered "underpriced" by many analysts on the big day. The share price jumped 36%, but it took the New York Stock Exchange over two hours to give the first price because of the sheer volume of trades. Not ideal for a first day, as a high rise is often followed by a steep fall.
But why would a Chinese company list in the US? That's the real controversy around the world's largest IPO to date. In the end, it comes down to power and control. The company's unique ownership structure allowed company founder andspiritual leader Jack Ma and some others at the top to nominate more than half of the company board. They were ready to give up the majority of shares, but wanted to keep the power structure intact.
When Hong Kong rejected the ownership structure of Alibaba, Jack Ma found more favorable conditions in New York
The Hong Kong stock exchange refused, wanting all shareholders to have the same rights. Going to New York brought another advantage: Regulatory control by the SEC — with a repuation for higher scrutiny and transparency were just what the formerly unknown company from China needed to gain trust with US investors.
Despite unrests in Hong Kong, Alibaba filed a secondary listing at the Hong Kong Stock Exchange in November 2019, offering 500 million new shares.
3. Facebook, 2012, internet technology, Nasdaq
Lots of people lost money when Facebook went public, leaving only a select few to profit from the IPO
Facebook's IPO — the bigest in technology — was a dud from the get-go. Mark Zuckerberg hated the idea. It would mean opening the books and giving up control. Eventually, he had to cave when the company crossed a threshhold of 500 shareholders, but the firm set up a dual-class stock structure that left him with 57% of the voting rights.
Investors criticized Facebook CEO Mark Zuckerberg for wearing a hoodie on the roadshow. The real trouble was waiting for them in the company's internal growth forecast they didn't learn about
The "road-show" where a company drums up interest from investors started with controversy both publicly and internally. Zuckerberg was criticized for wearing a hoodie rather than a suit. Even worse, Facebook informed Morgan Stanley, the bank handling its IPO, it had to cut its internal growth forecast — highly unusual so close to an IPO this size. Morgan Stanley only told some prime clients about this. The move eventually cost the bank $5 million in fines.
Despite a lowered forecast, Facebook went for the upper end of the price range and added an extra 25% of shares just two days prior to the IPO. Investors consequently would get more shares than they had hoped for. Except when IPO day came, a mysterious delay kept investors waiting.
Nasdaq's systems couldn't handle the massive amount of sell, buy and cancel orders placed, resulting in a huge disruption of trade and many unfulfilled orders that led to enormous investor losses. Those who did get to buy sold their excess shares quickly when the company failed to rain cash after a few days.