SFX Entertainment had a market value of $1.05 billion on Tuesday evening (Oct. 8). By the following afternoon, after SFX’s first day on the Nasdaq, the company’s market value had fallen to $919.2 million. That's the IPO market for you.
An initial public offering does not follow the laws of supply and demand seen on the stock markets. An IPO's underwriters sell shares to institutional investor clients who "subscribe," or buy in, after the company gives its road show to potential investors. The underwriters set the IPO price based on demand from these institutional investors. That demand could represent an institutional investor's interest in an underwriter's future IPO -- a desire to subscribe to a hyped social media offering, for instance -- rather than the company at hand. These forces create an IPO price that is separate from the market prices established once institutional investors start selling their shares.
Three factors helped influence the decline of SFX shares on Oct. 9, says Rich Tullo, an analyst at Albert Fried & Company. The IPO was priced too high. Tullo believes SFX shares would have performed better on the Nasdaq if the IPO price was between $11 and $13, rather than the high end of the range. He doesn't believe SFX received a lot of institutional support -- they bought the IPO but didn't support the company after shares were released. Finally, the market on which SFX trades had a bad day, finishing down 0.5%.
The bad start isn't necessarily bad for SFX, although the company will have to work hard to improve its perception on Wall Street. By setting the IPO price at $13, underwriters were able to maximize the amount raised from the IPO.
But the bad start is bad news for SFX investors. "Given that the stock is trading below $13, it's going to be hard to get back to the IPO price," Tullo says.
Companies that don't get a first-day bounce can still overcome a poor initial showing on the public markets. Take Facebook. Following an IPO price of $38, Facebook shares rose to $45 on the first day of trading before falling to $31.11 a week later and $17.73 fewer than four months later. But Facebook has focused on the fundamentals -- improving ads products and growing mobile revenue -- and has since risen to $51.60 (it closed Wednesday at $46.77).
Pandora had an IPO price of $16. On June 15, 2011, its shares opened at $20, rose as high as $26 and closed at $17.42. Two days later, Pandora shares hit $12.16. Shares fell below $10 in September. But Pandora has rebounded, and its shares are up 159% this year.
Live Nation, the publicly traded company most comparable to SFX, also rebounded after a slow start. On Dec. 14, 2005, Live Nation shares opened at $11.50 and closed at $11.05. Shares hovered around $11 for a week before climbing from $11.95 on Dec. 23 to $18.50 on Jan. 23. The company's shares have fluctuated over the years -- they dove during a difficult summer of 2010 -- but have risen 99.6% in 2013.