Scanning regulatory filings for a hot initial public offering (IPO) is often seen as a poor use of time. The sellers are perceived to be more informed, knowing more about their companies than investment firms and financial analysts who have only a short amount of time to acquaint themselves with a new company.
Looking back, there were plenty of reasons to pass on Mastercard's intial public offering in 2006. Lending was red hot. Banks were trading at some of the highest valuations in history, fueled by excessive leverage and loose lending standards in everything from credit cards to mortgages.
You might have rightfully questioned whether you were the "dumb money" if you lined up to snap up shares of Mastercard stock when it listed on the NYSE. After all, the people on the other side were smarter than you. The sellers in the IPO included more than 1,000 member banks in the Mastercard network who had a firsthand look at card data going back decades. It seemed as though they would have a better idea of what they were selling than what you were buying.
In the case of Mastercard, you would have watched as all these concerns were reconfirmed when the stock priced $1 below its expected range on the day of the IPO. But then you would have been proven a fool. Mastercard got off to a fast start, rising 18% in its debut, and shares never really looked back. Even at their financial crisis nadir, shares traded for more than three times their IPO price.
Mastercard (and Visa, for that matter) may have the most lucrative business in existence. As a payments network, Mastercard collects a microscopic fee on every swipe of its cards, thus acting as a toll road that generates a steady stream of ever-growing revenue and profits as more transactions shift from cash and check to cards.
While there have been many reasons to fear that the business could only get worse, most obviously when the Durbin Amendment put a legal cap on debit card fees in 2010, these issues proved to be mere bumps on the road to Mastercard's $133 billion valuation.
When Alphabet (then known as Google) filed its S-1 with the intention to go public in 2004, it had all the makings of a company that was trying way too hard to be different. The S-1 included an "owner's manual" for its shareholders that explained how it wanted its investors to view the company. A snippet of that owner's manual appears below:
Google is not a conventional company. We do not intend to become one. Throughout Google's evolution as a privately held company, we have managed Google differently. We have also emphasized an atmosphere of creativity and challenge, which has helped us provide unbiased, accurate and free access to information for those who rely on us around the world.
Creativity? Challenge? Didn't they understand that investors only cared about profits?
The company decided to flip the script on the IPO process, choosing to sell shares through an unconventional Dutch auction. Its odd corporate culture was evident in its IPO filing. Google, which is named after a "googol," or a number equal to 1 followed by 100 zeros, chose to sell 14.159265 million shares in its IPO. That number refers to the eight digits that follow the decimal place in the mathematical pi -- 3.14159265.
As for the maximum amount of money it wanted to raise, it pinned the number at $2.718281828 billion, a reference to the constant "e" in mathematics. The size of the offering puzzled analysts who followed the company, who suspected Alphabet would use the proceeds to buy another web business of significant size. (Its most significant acquisition after its IPO was YouTube, which it acquired more than two years after going public.)
At the reduced offering price of $85 per share, Alphabet was priced at more than 100 times its 2003 earnings. But that price ultimately proved cheap. It opened at a price 17% higher than its IPO price of $85 per share, closing with a one-day gain of 18%. It reached a closing low in the next month that followed, but after that, shares never traded at a discount to their opening price. In fact, shares only once ended a calendar year at a lower price than at the beginning of the year, and that was in 2008, when virtually every stock cratered in value.
The social networking company was the first big tech IPO since Google, and the hoopla surrounding its debut on public exchanges echoed the hysteria of the 1990s dot-com boom.
Ordinary investors who couldn't tell the difference between an income statement and a balance sheet, and who learned to distrust their brokers after the financial crisis, were now clamoring to get shares in Wall Street's most anticipated IPO. That set off some alarm bells.
You may have seen Facebook's IPO as the ultimate sign of a bubble in technology valuations. The first page of its S-1 filing referred to the 2.7 billion "likes and comments" on the website each day. That had an eerie resemblance to the dot-com boom, where start-ups were valued based on "hits" and "eyeballs" perusing their pages on any given day.
Critics asked how Facebook wasn't another iteration of Friendster or Myspace, two early social media flameouts. Why should Facebook sell for more than a century of earnings at its then-current run-rate, given that most social media sites struggled to remain relevant for a fraction of a decade?
Facebook's CEO, Mark Zuckerberg, quickly became a punching bag for Wall Street, as he wore a hoodie and jeans to meet with analysts and investors who dressed in their very best suits. One analyst slammed him for his appearance:
Mark and his signature hoodie: He's actually showing investors he doesn't care that much; he's going to be him. I think that's a mark of immaturity. I think that he has to realize he's bringing investors in as a new constituency right now, and I think he's got to show them the respect that they deserve because he's asking them for their money.
Zuckerberg was going to be him, that's for sure. Just one month before its planned IPO, Facebook acquired Instagram, a company that had just 13 employees and no real revenue model, for cool billion dollars. Generally, companies tend to shy away from big deals before going public, so as not to give the appearance that the company will use its publicly traded stock as an endless source of currency to pay for transformative acquisitions.
Few batted an eye at Facebook's strange behavior. Facebook originally filed for an IPO that would price its shares at $28 to $35. Then it filed to sell 25% more shares due to high demand. Two days before its IPO, it raised the target range to $34 to $38 per share. This was, according to many observers (myself included), a sign of pure irrationality.
Facebook, which was expected to trade at 11 a.m., didn't start trading until 11:30 a.m. due to technical problems. The stock finally opened for trading at $42 per share, 50% higher than the bottom of its earlier range.
Then it all came crashing down. Two weeks after its listing, Facebook had lost nearly a quarter of its value. This marked the ultimate "I told you so" moment for its detractors, who were later proven wrong. Dead wrong.
Facebook's Instagram acquisition easily earns a spot in one of the greatest acquisitions of all time. And its ad-driven business is perhaps one of the very best. Last year, Facebook generated an astonishing $62.23 of revenue per user in the U.S. and Canada, nearly 360% more than the $13.58 in revenue it generated per user in 2012, helped by a mobile business that few people believed in at the time of its IPO.
Not all IPOs end happily
Long-term studies regularly show that IPOs generally underperform the average for periods as long as five years after initial listing. Conventional wisdom is likely right about why IPOs underperform: Companies choose when to go public, and are unlikely to sell out on terms that are more favorable for the buyer than the seller.
Admittedly, it's difficult to draw the line on what defines the "best" IPOs. Should it be one-year performance, or 10-year performance? Should companies that list at $10 million valuations be put in the same group as those that list as billion-dollar behemoths?
Ultimately, I settled on Mastercard, Alphabet, and Facebook for the simple reason that they have all trumped the market's return, and did so from a less-than-privileged position. Each company on this list was a billion-dollar company at the time of the IPO, and each one had plenty of detractors (myself included) who believed that their IPO prices represented a top, rather than a bottom. Time proved what these businesses were truly worth.