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.

MasterCard went public in 2006 with a $2.4 billion offering, while Visa went public in 2008. Both are heavily owned by the institutional community. Some 82% of MasterCard's outstanding shares are owned by institutional customers, while 84% make up Visa's ownership. MasterCard priced its shares at $39, below its planned range on May 24, 2006. Since then the stock has had a total return of over 1,000% while the S&P 500 only delivered a total return of approximately 28%. MasterCard is currently trading near $570.

Visa priced at $44 a share in 2008, which made the offering worth $17.9 billion. It's currently trading at $180. It has had a total return of 300%, easily beating the S&P 500, which again only delivered a return of roughly 28% during the same timeframe. Keep in mind that Visa went public not long after Bear Stearns found itself in dire straits, so its total return in spite of the timing is especially impressive.

HCA ( HCA) had name recognition as a large hospital entity when it went public in 2011with its $3.7 billion deal. It priced at $30 as demand drove up the offering size. Institutional holders own 59% of the outstanding shares and the stock is now trading at nearly $39. So, at first glance it looks pretty good.

However, while HCA has had a total return of 26% since going public, the S&P 500 has also returned 25%. So respectable, but not amazing. HCA ran into problems when patients opted out of elective surgeries during the fiscal crisis, causing the stock to plunge during the summer of 2011. The stock, though, is up over 50% for the past year, so those patient institutional holders look like they will finally make some headway on their investments.

The last two monster IPOs haven't fared as well. They had institutional backing, but not household name recognition. Blackstone went public in June of 2007 with a $4.1 billion deal pricing shares at $31. It may have been well known in the financial world, but could your mother recognize this company name? Its total return is down 38% since going public, while the S&P 500 is up 6%. Some 78% of the stock is held by institutions. MF Global followed up with an offering in July of 2007 with a $2.9 billion deal. At the time, institutional names, the buyers that did know the company, were clamoring for stock. It isn't even in business anymore. Although its scandalous downfall did turn it into a recognizable name.

General Motors ( GM) isn't the typical IPO. It was bailed out to the tune of $50 billion by the government during the fiscal crisis. The stock sale represented the government's attempt to recoup some of this money. In addition to that, the U.S. Treasury has been selling large blocks of stock, making this offering difficult to compare to others. According to Thomson Reuters, only 43% of the company's shares are held by institutions.

Another measure of size is the largest first-day pop. "Intuitively, it shouldn't work," says Smith, "But after the first day, these one hit wonders have good total returns." Baidu ( BIDU) jumped over 350% on its first day and so far its total return is almost 1,000% since going public. Youku ( YOKU)and Qihoo ( QIHU) both soared over 100% on their first day of trading and Youku now has a TR of 56%, while Qihoo's is up 193%. Even LinkedIn ( LNKD) enjoyed a run up of over 100% on day one and has since delivered a TR of 263%.

"The initial pop is interesting, but only if you already own it," says Schuster. "Historically, they haven't provided much more in return and it's too much risk." He backs away if a stock climbs more than 55% in the first day. He's right. Most of the return for these companies comes in that first day, the investors that come in later may get some good performance but not the wild numbers that are enjoyed by the initial holders on that first day.

The next mega offering ahead will be Coty Cosmetics. It will be over $1 billion and it has name recognition. The cosmetic powerhouse owns major nail brands OPI and Sally Hansen. It also produces famous celebrity colognes for Jennifer Lopez, Beyonce and Lady GaGa. It has an annual average growth rate of 16% and even though it took millions in charges at the end of 2012, this is a powerhouse company. Buzz is building and Coty could be the next billion dollar deal to make institutional investors very happy.

--Written by Debra Borchardt in New York.

>To contact the writer of this article, click here: Debra Borchardt.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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