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Bigger Is Better In IPOs

NEW YORK (TheStreet) -- Over the past few years, the IPO market has seen some monster-sized offerings go public. These mega-IPOs are valued in the billions. However, the performance hasn't been even across the board, so the eternal question remains - does size matter?

It isn't an easy comparison. Some of the biggest offerings have had more time on the market to improve total return like MasterCard (MA) and Visa (V). Both of these offerings were huge deals and both have had tremendous total returns. Facebook's (FB) monster-sized offering, which was botched by NASDAQ, has not paid off for investors. The one thing they do have in common is institutional investors.

"Big ones tend to do better because they are sizeable businesses that are better known," said Kathy Smith of Renaissance Capital. This deal size allows for institutional investors to buy large amounts of stock. Smith points out that these investors do their own research, have done better homework and so the deals they are interested in tend to be better priced. "These are instant blue chips," says John Fitzgibbon of IPO Scoop. He believes the inclusion of institutional buyers supports the stock prices. "They are tucked away in an institutional portfolio never to see the light of day."

Critics of the Facebook IPO say it fell victim to poor pricing when individual investors outnumbered the institutional investors. Institutional investors were balking at the price of Facebook before it went public, while there was frenzy amongst retail investors who hadn't so much as read the filing for the offering. Morgan Stanley (MS) is facing litigation for allegedly alerting institutional players to Facebook's earnings prior to the offering going public, which supposedly is what caused the institutional investors to complain about the price. The individual investors didn't seem to care about the financial details; they just wanted a piece of the social network. Today, less than half of Facebook's ownership is institutional and the stock has struggled since it went public.

Josef Schuster, founder of IPOX Schuster, agrees that larger IPOs perform better than smaller ones because of the institutional ownership. "It's all about the pricing. The larger deals have an audience that's harder to please," said Schuster, referring to the institutional players. "More buyers are needed, so the pricing is competitive." He also points to the name recognition of the larger companies. Visa and MasterCard are well known household credit card names, while financial behemoths like Blackstone (BX) and MF Global were not.

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