Paypal is an online credit card payment company. The company’s services facilitate users to send payments via email to businesses or individuals. Paypal earns its revenue by charging its users for the services. In 2002 the company completed a successful initial public offering. However, Paypal success at the stock market was term as improbable since the period preceding the actual offering was characterized by a number of setbacks.
These drawbacks were associated with the company’s financial position at the time of the offering and lawsuits commissioned against the company just before the pricing of offering. The first problem involved Paypal unprofitably nature at the time of the offering. Some sources had given the claims that the internet-based payment company was losing money at the time they were planning for the IPO (Hennessey, 2002). This was in fact true. Paypal was yet to post profit and in the wake of its initial public offering it had posted a net loss of $ 89.3 for the nine months ending September 30, 2001 (Punch, 2002)
This was likely to affect the value of Paypal shares as few investors would wish to buy high valued shares from a loss-making company. Before the IPO analyst claimed that Paypal may find itself in tight spot if investors fail to meet its claiming price. Therefore, it was logical to suspend the offering until situation at the company improved. The timing of the IPO also raised a lot of questions. Some sources have argued that placing the IPO in the period when the US had experienced it worst terrorist attacks was not prudent (Elgin, 2001). These sources have argued that the terrorism incidents had reduced the markets confidence and may also have brought about economic recession in the country.
Another setback involved row with rival company CertCo Inc. CertCo Inc filed a law suit accusing Paypal of infringing on the former’s patent rights issued in 2000 by providing electronic payment service for online auction systems. This lawsuit compelled Paypal to refile its offering with Security and Exchange Commission in order to ensure that the lawsuit issues are also addressed in the pricing of the offering. Its refiling of the documents revealed other potential problems for Paypal. News came out that the company had received a letter from Tumbleweed Communications Corp also accusing Paypal of infringing on two of its patents (Hennessey, 2002).
No law suit had been filed involving these later claims. The filing also revealed that Paypal’s director of communication had spoken to Gartner analyst responsible for preparing the Paypal IPO report, which is contrary to security laws. Just when every body thought that things could not be worse for paypal, the files by Paypal also revealed that, the company was under scrutiny by bank regulators in New York and Louisiana, California and Idaho. Paypal was being accused of involvement in unauthorized banking in the states in New York and Louisiana and was facing possibility of fines totaling to as much as $ 25000 per day in New York and $ 1000 a day in Louisiana.
All these drawbacks would definitely have had an impact on the performance of Paypal initial public offer. Though the above mentioned setbacks appeared to be enough reasons for Paypal to have withheld its initial public offering, Paypal directors may have had other ideas in mind. Despite the fact that Paypal nature of being unprofitable would have reduced the success of the offer, Paypal management was relying on the strong brand recognition of the company to propel its prices in the stock market.
The brand Paypal had become a household name in the world of e-commerce with the company boasting of controlling 65% of the online electronic payment. Fortunately, what the management team was hoping for is what happened during the offer. After the IPO, Paypal recorded a 55% gain in the value of its shares during the first day of trading. Sources have indicated that Paypal may have overlooked all these indicators for a failed IPO process because its main driving force in participating in the IPO may not have been to raise money but to cement the company position in the market a head of its competitors (Elgin, 2001).
Paypal may have been looking forward to achieving the benefits of better visibility and image that would be brought about by the IPO process. Getting to back to the question, if you had been in charge, how would you have handled PayPal's IPO process differently? My answer would be yes. This is because many financial analyst and other stakeholders interpreted Paypal’s move in terms of their experiences with other companies.
They had the view that the main aim of the IPO was to raise funds and that lack of profitability by Paypal would jeopardize the success of the IPO. However, Paypal directors seemed to have their own goals in mind and new how to pursue them even after everyone interpreted the process in a negative light. Every action and decisions in an organization are ideally driven towards achieving the organization goals and it seems this was what was important for Paypal directors. If I was in charge I would also have focused on achieving the goals of the organization. Even when this would mean proceeding with the IPO process when every body else think it is a mistake.
Elgin B. (2001). Can PayPal Pull This Off?. BusinessWeek, October 29, 2001, retrieved March 7, 2011
Hennessey, R. (2002). Deals & Deal Makers: PayPal's Debut May Not Signal Web-IPO Trend, Wall Street Journal; New York, N.Y.; Feb 19, 2002. retrieved March 8, 2011
Punch L. (2002). Paypal’s IPO Waits in the Wings. Credit Card Management, Feb 2002 (14)
Wingfield, N. & Bransten, L. (2002). PayPal Insiders to Sell Shares Valued at About $141.9 Million. Wall Street Journal; New York, N.Y.; Jun 13, 2002, retrieved March 8, 2011