Martha Bodyslams WWF

During the week of October 18, 1999, both Martha Stewart Living Omnimedia Inc. and the World Wrestling Federation (WWF) went public in IPOs. This created a lot of public interest, and it led to media reports comparing the two companies. Both deals attracted strong investor demand, and both were well received. In its first day of trading, WWF's stock closed above $25, an increase of nearly 49 percent above its $17 offering price. Martha Stewart did even better—it closed a little above $37, which was 105 percent above its $18 offering price. This performance led CBS MarketWatch reporter Steve Gelsi to write an online report entitled, "Martha Bodyslams the WWF!"

Both stocks generated a lot of interest, but when the hype died down, astute investors recognized that both stocks have risk. Indeed, one month later, WWF had declined to just above $21, while Martha Stewart had fallen to $28 a share. Many analysts believe that over the long term WWF may have both more upside potential and less risk. However, Martha Stewart has a devoted set of investors, so despite all the uncertainty, the one certainty is that this battle is far from over.

Source: Steve Gelsi, "Martha Bodyslams the WWF," http://cbs. marketwatch.com, October 19, 1999.

the table shows, not all IPOs are as well received as were Netscape and Boston Chicken. Moreover, even if you are able to identify a "hot" issue, it is often difficult to purchase shares in the initial offering. These deals are generally oversubscribed, which means that the demand for shares at the offering price exceeds the number of shares issued. In such instances, investment bankers favor large institutional investors (who are their best customers), and small investors find it hard, if not impossible, to get in on the ground floor. They can buy the stock in the after-market, but evidence suggests that if you do not get in on the ground floor, the average IPO underperforms the overall market over the longer run.5

Before you conclude that it isn't fair to let only the best customers have the stock in an initial offering, think about what it takes to become a best customer. Best customers are usually investors who have done lots of business in the past with the investment banking firm's brokerage department. In other words, they have paid large sums as commissions in the past, and they are expected to continue doing so in the future. As is so often true, there is no free lunch—most of the investors who get in on the ground floor of an IPO have in fact paid for this privilege.

Finally, it is important to recognize that firms can go public without raising any additional capital. For example, Ford Motor Company was once owned exclusively by the Ford family. When Henry Ford died, he left a substantial part of his stock to the Ford Foundation. Ford Motor went public when the Foundation later sold some of its stock to the general public, even though the company raised no capital in the transaction.

Differentiate between a closely held corporation and a publicly owned corporation.

Differentiate between a listed stock and an unlisted stock. Differentiate between primary and secondary markets. What is an IPO?

S elf-Test Questions

5See Jay R. Ritter, "The Long-Run Performance of Initial Public Offerings," Journal of Finance, March 1991, Vol. 46, No. 1, 3-27.

TABLE 5-1 Initial Public Stock Offerings in 2001

Issuer (Business)

Issue Date

Offer Price

U.S. Proceeds (millions)

% Change from Offer in 1st Day's through Trading Dec. 31

The Best Performers

Verisity

3/21/01

S 7.00

$ 26.8

+ 14.3%

+ 170.7%

Magma Design Automation

11/19/01

13.00

63.1

+46.1

+ 129.2

Monolithic System Technology

6/27/01

10.00

50.0

+ 12.2

+ 108.0

Williams Energy Partners

2/5/01

21.50

98.9

+ 11.6

+91.2

Nassda

12/12/01

11.00

55.0

+40.5

+ 85.6

Accenture

7/18/01

14.50

1,900.2

+4.6

+83.1

PDF Solutions

7/26/01

12.00

62.1

+26.3

+77.9

Willis Group Holdings

6/11/01

13.50

310.5

+23.0

+73.3

Select Medical

4/4/01

9.50

98.3

+6.6

+ 71.3

Odyssey Healthcare

10/30/01

15.00

62.1

+ 15.0

+68.3

The Worst Performers

Briazz

5/2/01

S 8.00

$ 16.0

+0.4%

-88.9%

ATP Oil & Gas

2/5/01

14.00

84.0

0.0

-79.9

Investors Capital Holdings

2/8/01

8.00

8.0

-6.1

-64.9

Align Technology

1/25/01

13.00

149.5

+33.2

-64.6

Torch Offshore

6/7/01

16.00

80.0

+0.4

-62.8

Enterraa

1/10/01

4.50

5.2

-4.2

-60.4

Tellium

5/17/01

15.00

155.3

+39.5

-57.5

Smith & Wollensky Restaurant

5/22/01

8.50

45.0

-8.6

-55.3

General Maritime

6/12/01

18.00

144.0

-6.9

-47.2

GMX Resources

3/15/01

8.00

10.0

0.0

-46.9

aWent public as Westlinks and changed

name later

Source: Kate Kelly, "For IPOs, Market Conditions Go from Decent to Downright Inhospitable," The Wall Street Journal, January 2, 2002, R8. Copyright ©

2001 Dow Jones & Co., Inc. Reprinted by permission of Dow Jones & Co. via Copyright Clearance Center.

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