Private Banking Clients Should Avoid Internet IPOs

Private investors should be skeptical about investing in the new wave of initial public offerings (IPOs) for internet companies’ stocks. This is the main conclusion of new research by MyPrivateBanking, for which we compared the main players, mechanisms and results of the late 1990s/early 2000s dot-com bubble with the newly developing wave of Internet IPOs, mainly Chinese internet companies and social networks. In particular, wealthy clients of the banks leading these IPOs should be on the alert if they are offered the chance to participate in IPOs orchestrated by their bank. 

It’s common practice for the investment banking division and wealth management division of large banks collaborate to distribute IPO stock among their wealthy individual clients. For the investor a somewhat risky investment and dubious practice in the opinion of MyPrivateBanking, which has subjected a list of the top ten high-profile, value-losing dot-com IPOs to a detailed review. In not one single case did investors – over the long term – make a profit from the IPO. In 60 per cent of cases investors lost all or almost all of their assets. Besides these 10 listings there were many IPOs of lesser known companies, now long gone and forgotten by all except the investors who lost a lot of money.

Top 10 High-Profile, Value-Losing Dot-Com IPOs

*      excluding dividends
**   weighted average price of all stock offerings

A central role for the irrational exuberance of the dot-com bubble was played by IPOs for almost unknown companies with, relative to their valuation, little in the way of revenue or profits, if there were any profits at all. Looking at the balance sheets accompanying, in particular, the recent IPOs of social media ventures and Chinese Internet companies, we see a lot of similarities that should worry an investor.

These similarities don’t end with the sky-rocketing valuations. According to MyPrivateBanking Research, many of the investment banks that lead-managed issues in the dot-com bubble crop up again when looking at 16 of the most prominent Internet and social media IPOs since December 2010: Morgan Stanley is among the lead underwriters in 50% of cases; Deutsche Bank and Credit Suisse were part of the lead underwriters in 31% of cases; Goldman is among the lead underwriters in 25 % and BofA Merrill Lynch in 19% of the cases.

Of course there have been successful Internet IPOs as well, but we see the risk-reward relationship as far too unpredictable and disadvantageous for private investors. There is a substantial risk for investors that the mix of the same major players, mechanisms and promises that were seen in the last tech boom eventually leads to the same, disastrous results.

MyPrivateBanking recommends that private banking clients be skeptical when offered an opportunity by a bank to participate in an IPO of an internet related company. Investors should, at a minimum, thoroughly check the business model, sustainability of revenues and profits and ask the offering bank some searching questions, for instance, about its underwriting history and how many shares remain with the newly listed company’s founders and original investors.

For the full research brief including the table on the most important social media and Internet IPOs in 2011/2012 incl. the lead underwriting banks please click here.