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Paul Sullivan

The recipe for a successful IPO Add to ...

The biggest initial public offering in North America so far in 2010 is not some hot Silicon Valley tech stock; in fact, it is Canadian, which is usually an antidote for excitement.

Athabasca Oil Sands Corp. launched its IPO in April, and its performance to date hasn't been very inspiring. It started out well - opening at $18, but slipped to $17 by the end of the day. It's now trading just above $10.

It's a fairly common - and depressing - feature of the IPO market that hedge fund traders take advantage of the hype and drive up the price on the day it's offered, and then flip it with hair-trigger urgency as soon as possible. Not long after the Athabasca IPO, the Globe's Andrew Willis reported that many shares may have went to hedge fund dealers who bailed out quickly as soon as they realized they weren't going to make a quick killing.

Even though Athabasca raised $1.35-billion, the stock's slide put a chill on IPOs in the pipeline. That chill hasn't yet deterred Intrawest Corp., which Oct. 8 filed its intent to go public with Whistler Blackcomb Holdings Inc. Intrawest hopes to raise $345-million from the offering, with shares expected to sell for $14 to $15. Coming on the heels of the winter Olympics in February, the timing seems good.

But the timing appeared good for Athabasca, too - the price of a barrel of oil was back up to $86 (U.S.) for the first time since 2008.

The past holds many clues

So what is the difference between a successful IPO and a flop? The best way to find out is to take another look at some successful IPOs and follow their example.

One of the most successful IPOs in recent times is Visa Inc. , the credit card giant that went public on the New York Stock Exchange on March 18, 2008 - right on the threshold of the worst recession since the Dirty Thirties. No problem: Visa raised $17.9-billion. By the end of the day, its stock was trading at $44, two dollars above the high end of expectations, and the following day it went to $66. Unlike at Athabasca, Visa's bankers weeded out the share flippers and it became the biggest IPO in U.S. history. Today, Visa continues to roll right along, trading at about $79.

Visa may be the exception to the general IPO trend. For too long, success has been determined by how much the stock goes up on the first day it's offered. Visa had a great pop, climbing 28 per cent on its first day, but because buyers held the shares, they kept their value on day two, as the market wasn't flooded with new supply.

According to The Motley Fool, studies show that the best-performing IPOs in the long run are shares that experience a modest pop on day one: less than 20 per cent. Believe it or not, that's how much Google Inc. earned on its first day when it offered its shares for $85 (U.S.). Anyone who managed to buy those shares, and continues to hold them today, is likely a very rich person. Google is trading at about $615 and 30 of 38 analysts polled by CNNMoney think it's still a buy.

At that price, it's hard to remember that Google kept lowering the price of its initial share offering because most smart people thought the price was too high at $95 US. So Google brought it down and took 5 million shares off the market, giving buyers only about 75 per cent of the shares they sought, creating pent-up demand for the stock. It seemed to work. It's amusing to go back to 2004 and read the pundits in the wake of the Google IPO. Alan Sloan, Newsweek's Wall Street editor, offers what has to be the worst advice in the history of advice-giving: "So I'll say it again. If you're looking at the long term, don't buy Google at this price. Wait; it will get cheaper. Sure, I was wrong about the IPO price - but at $109.40 a share, I have no doubt whatever that betting on a price fall by selling Google short is a heckuva lot better bet than buying at this price."

Look for growth

Not all IPOs are a three-ring Google circus. One growth company that did well on day one and has continued to issue solid returns since its IPO is Blue Nile Inc. , the Seattle-based online diamond and jewelry retailer. Blue Nile started at $20.50 on May 19, 2004, and had a nice 28 per cent pop to $28.09 by the end of the day. Today, Blue Nile remains strong, trading around $42. The secret appears to be simple but hard to duplicate.

Back in 2004, IPOHome.com predicted Blue Nile had plenty of room to grow - more than 20 per cent a year, and grow it has. Second-quarter revenue was $76.6-million US, compared to that first quarter of 2004, when it was $35.8-million. In the face of increased competition, higher trading prices for gold and diamonds and a collapse in demand for bright sparkling objects, Blue Nile stock is well off its 52-week high near $67 from last October, but it is still about double its IPO price.

Blue Nile continues to innovate - it recently launched a diamond-buying app for the iPhone - and analyst consensus is to hold the stock.

So, to summarize, if you're going to make an IPO, follow these three guidelines of successful predecessors:

1. Vet the initial buyers carefully, weeding out those interested only in making a quick flip and a quick buck.

2. Don't worry about the day one pop and focus on days two and beyond.

3. Make it clear that you still have plenty of room to grow.

 

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