The Paradox of Successful IPOs

The stock market remained in an upbeat mood, with further gains led by the Nasdaq Composite (^IXIC 0.71%). More modest advances for the Dow Jones Industrial Average (^DJI 0.19%) and S&P 500 (^GSPC 0.43%) reflected continued optimism that the U.S. economy might be able to weather high interest rates for as long as it takes for the Federal Reserve to complete its fight against inflation.


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Data source: Yahoo! Finance.

Yet not everything went well on Wall Street. Initial public offering (IPO) stocks play a vital role in gauging the sentiment of market participants, and many investors love to see share prices of newly issued stocks soar on their first day of trading.

That didn’t happen with Birkenstock Holding (BIRK), and some, therefore, dubbed the iconic footwear manufacturer’s IPO a failure. Yet paradoxically, the definitions that many people use to determine whether an IPO is successful runs contrary to the impact an offering can have for the company itself.

What happened with Birkenstock on Wednesday

Overnight, investors who were able to participate in Birkenstock’s initial public offering were informed that they would pay $46 per share for the stock they agreed to purchase. That was roughly in the middle of a range of $44 to $49 per share that the German shoemaker had provided earlier, which didn’t raise any alarm bells.

However, before the stock opened for trading in the public market early Wednesday, market makers on the New York Stock Exchange had to balance buying and selling interest in order to find an appropriate indicated price for the stock’s debut.

It became evident early on that the price that market makers would select would need to be lower than the $46 per share that IPO participants paid. Indeed, Birkenstock opened at about $41 per share and closed its first day even lower, at $40.20 per share, down almost 13%.

Headlines quickly came out that blasted the offering. Bloomberg  called it a “trend-setting debut flop.” Yahoo! Finance posted a video in which a former retail executive called the $46 per-share price “greedy.” Even one of my own peers writing for The Motley Fool said Birkenstock “flopped in its IPO” today.

All in all, sentiment surrounding the Birkenstock IPO was profoundly negative. Many seemed to think it could signal a slowdown in the entire market for stocks looking to go public.

Winners and losers

Paradoxically, though, the IPO was a success from several perspectives. Birkenstock itself received $46 per share on the 10.75 million shares it sold in the offering. That raised roughly $495 million for the company’s business purposes.

In addition, several existing shareholders chose to sell shares in the IPO. Indeed, roughly twice as many shares — 21.5 million — came from selling shareholders, who received close to $1 billion at the IPO price.

Say, for example, that Birkenstock had priced the IPO at $30 per share instead of $46. The market presumably would have thought the stock was a bargain, leading to a nice jump of more than $10 per share on the day. Instead of downbeat headlines, you’d be hearing about the huge success of the Birkenstock IPO.

Yet from Birkenstock’s perspective, the result would’ve been less positive. At $30 per share, the company would’ve raised less than $325 million and existing shareholders would have gotten only about $650 million. That would be hundreds of millions of dollars less for the original owners of the company.

Whenever you hear about an IPO being good or bad, make sure you understand the perspective. A falling share price after an IPO might seem like a public relations disaster, but it means the company got as much as it could get for the shares it sold.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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