Monday, October 8, 2018

Carnival Cruise Lines - How IPOs Were Supposed to Work

What were IPOs originally designed to do?

As I noted in an earlier posting, the modern IPO is nothing more than a vehicle for company founders to "cash out" by creating a marketable equity in their company.   They create hype, sell 5% or so of the company to chumps like you and me at the IPO (which doubles in price, enriching their friends who assisted with all the hype) and then later on, they can sell their own shares to more suckers and make a fortune.

'Twas not always the case!

Once upon a time, companies did IPOs to raise cash to build a factory, expand operations, or other legitimate business goals.  And the Carnival IPO of the 1980's is a case in point.   Back in 1987, before the market crashed, the founder of Carnival Cruise lines sold of a whopping 20% of the company in an IPO, and raised an awful lot of cash.   When the stock market receded in the late 1980's, he was the only guy in town with cash on hand, and he went on a buying spree, snapping up other, struggling cruise lines, to become the world's largest cruise company with nearly 50% of the market.

That's how the game is supposed to be played.   And yea, he made a lot of money doing it - for himself, but also for the other shareholders.  The IPO raised real capital which was invested by buying other companies, creating economies of scale and increasing profitability and also the worth of the company.

Contrast this to the modern-day IPO, which is often for some money-losing "dot com" company which is little more than a website, an app, and an idea of how to sell people some sort of service or product like a meal kit, or whatever.   These types of IPOs don't raise a lot of capital - and indeed, most of these companies don't really need the capital.  What they need is a profitable business model, more customers, less customer churn, a lower "burn rate" and a real plan to make profits.

But that isn't the point.  The point is to sell-out and cash-in.   And such was always the case.  I noted before a fellow Patent Attorney friend of mine set up a "dot com" company back in the early 2000's, with an atrocious "burn rate".  He hoped to sell out the company early on and make a tidy profit.  But unfortunately for him, he was still standing up when the music stopped, and he lost it all.

Will we ever see a return to the old days of the legitimate IPO?   I wonder, sometimes.  It seems today that whenever someone does have a legitimate product or idea, they resort to sketchy things like "crowd funding" instead of more traditional investment.   And it seems more and more than private equity is sucking all the air out of the room, leaving the stock market as the last resort investment for "retail" investors (chumps like you and me) who have the choice of either investing in old-line companies who have yet to go private (through private equity buyouts, where the company is sold off in chunks and pieces to chump investors in - you guessed it - new IPOs) or investing in these scam-job IPOs for "new technology" companies, whose "technology" consists of little more than selling shit on the Internet.

I think the old-school IPO will come back - someday.  But in the meantime, a reckoning will be on the horizon, as a lot of what is propping up the current market is merely euphoria.