It has been awhile since I have pondered the goings-on of Wall Street and the capital markets. Two IPO’s of recognition that I have been watching are General Motors (GM), and lesser know but much touted Pandora (P). Both companies came to market with a lot of noise a couple of months ago. Pandora is an online radio station, and General Motors manufactures automobiles. They are very different companies but the process for going public is similar.
There is much research to be done before bringing a company public, any company. The analyst and bankers that bring a company public, if it gets that far, start with a road show. The road show is a Wall Street phenomenon reminiscent of a high-class carnival. This occurs prior to the company stock trading on the NYSE. The road show creates a lot of excitement for retail brokers in banquet rooms all across America. The lead banker will have the event catered. Lavish buffets, with an endless supply of African lobster tail, jumbo shrimp, and filet mignon, are served. The only meatballs are the attendees. The booze flows freely, as there is an open bar with plenty of top shelf liquor, all free. In the front of the room there is a small group of people sitting in chairs listening to the presentation. These are the compliance officers, the straight ones; the ones responsible if anything goes wrong. In the back of the room, half crazed brokers full of gin and the latest designer drug are getting wound up, there is a party erupting. Brokers are guzzling free booze and stuffing their pocket with lobster tail and filet mignon, many still living at home with Mom and Dad.
There are skeptics and disbelievers of the venerable IPO market, there always will be, but the majority are pom-pom waving cheerleaders with a good story to tell a prospective client. Setting the price for a new stock issue is a complicated process. Involving advanced mathematical formulas that nobody really understands; it is more like a best effort. The offering price on both companies had been raised, several times, above the expected asking price. Finally and after much fanfare, the IPO price was set at $16.00 a share for Pandora, and for GM it was set at $32.00. Professional money managers were saying, “buy” with the caveat of long-term value and great brand recognition, at least one of those may be true.
On the first day of trading both stocks were up, Pandora was up substantially. I remember CNBC called the opening bell that morning from the floor “And here on Wall Street trading begins on the opening bell,” they say that every morning. Really makes you feel like the casino is open for business, it is the best. The CNBC reporters are running around the floor of the stock exchange, getting all of the latest gossip – I mean news – from the specialist and traders on the floor about today’s trading activity.
The CEO of Pandora, Mr. Kennedy, was walking on the floor of the NYSE the day the stock opened for trading; he was like a kid in Candyland. A female reporter for CNBC did a quick interview with him. She asked him about the company’s three billion dollar valuation, a high price for a company not making money. The question, to the heart of the matter, set him back on his heals. It was as if he were punched in the stomach, a shot that buckled him. He started to mumble something, sounding uninformed and misguided. His knees started to buckle and I thought he was going down for the count. Before he said something foolish on national television one of the bankers, who brought the company public, quickly stepped in to answer all questions. Talking about perceived value and other non-descript terms that evade an honest answer. “The value of Pandora… as a brand is HUGE…HUGE” he said. It is hard to argue with such well-dressed optimism.
CNBC tried to talk with Mr. Kennedy again but the earlier question of how can a company be worth 3,000,000,000 and not have any revenue was too direct and straightforward. A normal person does not have the skill set to answer such a question; there is no logical answer. When Mr. Kennedy found himself in the crosshairs to answer more questions, a bunch of financial gobble-de goop, he did what anyone would have done, defer it to the bankers and walk away, exclaiming it is all very complicated.
June 15, 2011, the first day of trading, you could have sold a share of Pandora stock for nearly$27.00, a quick 70% gain. GM’s first day of trading, Nov 17, 2010, didn’t have the same pop that Pandora did, up only 12% to $35.90, but had the stock been held for 60 days it would have risen twenty two percent to nearly $40.00. Not a bad return on your investment, sounds good to me… how do I get in, where do I sign up!
Not so fast, Skippy. Unless you sold quickly, and retail investors are told to buy and hold, to not even look at how there investments are doing, you are loosing money. The sun would not be shining on the owners of those particular shares of stocks today. Both companies raised a lot of money with their initial public offering, but the road show is over, and now investors are loosing money. Pandora fell to a low of $9.33 and General Motor’s low was $19.05. At the close of trading today (P) rose .85 up 6.33% to $14.28 a good day for the stock and (GM) was down .05 to $22.50.
A wiser man than I once told me,” David, investing is like religion, it is what you believe”.
David Helmericks
