The Biggest IPO Scam of All Time?

An initial public offering, known commonly as an IPO, marks a key moment in the life of any company.

For the owners and early investors, it’s a bit of a finish line… a moment when years of work and waiting finally pay off and shares can be liquidated for a much-anticipated payday.

It’s also a moment when, for the first time, the public gets to invest.

So while early investors might be selling, a whole pack of new blood, pushed by brokers, the news, or both, starts buying.

The hope is generally that once a company goes public and the early investors get their much-deserved rewards, the public investors will also profit from continued growth.

That’s the way it’s worked for our most famous brands and companies for well over a century.

However, there’s another way an IPO can go, and it’s nowhere near as glamorous or champagne-worthy as the ideal scenario.

For many companies, that IPO moment marks the high-water mark for the company, and after the early investors get their earnings, the company begins to fall flat.

It’s happened plenty of times, especially in an age where the spread of information is instant and the volume of information is nearly infinite.

For an example, just take a look at Shanda Games Limited (NASDAQ: GAME).

One of the biggest IPOs of 2009, the company went public at $11, but within a year it had dropped by almost half that value.

By 2013, it was trading at one-quarter of its first-day price.

Going public worked well for the founders and venture capitalists, but for the everyman who bought shares on E-Trade the day it debuted, it was a rout.

Or how about Vonage, that early voice over IP communications company everyone was so excited about back in the first decade of the 2000s?

In 2006, its stock went public at $12.

Within three years, it was trading at $0.40.

Once again, the smart money left rich. The latecomers who bought into the hype lost more than 90%.

And then there’s the fateful story of Pets.com — an online store catering to animal lovers the world over.

You’d think this was something that couldn’t fail, especially with the pet-crazed American market that was worth close to $50 billion per year when this saga was unfolding.

Its stock went public at $14 in 2000.

Unfortunately, not even our furry friends were immune to the dot-com implosion. The result? Post-IPO investors in Pets.com saw their shares plummet to $0.20.

The company ultimately dissolved.

And again, the early owners took home the money, while the faithful public sector took home the heartbreak.

The list goes on and on, with the same exact storyline playing out each time.

Lots of prospect, lots of profit, lots of hype… followed by a public offering… followed by disappointment… followed by collapse.

Even Facebook (NASDAQ: FB) wasn’t immune to the viral overhype of its own IPO.

Although early investors made billions on the first day of trading in May of 2012, those who took the hot potato at $33/share didn’t see that price again until the following January, when shares matched the IPO price for the first time…

And it wasn’t until July of 2013 that the stock finally lived up to the initial mania and found its legs — by that time, however, millions of retail investors had already lost as much as 45%.

For many, this dynamic represents the ugliest side of capitalism… the moment when the rich get richer at the expense of those everyday investors who never had access to the investment when it was undervalued.

For me, it represents an unfortunate but necessary truth: The hype cannot overwhelm the reality.

And the more hype there is, the less realistic that IPO will be — for anybody wanting to hold it, that is.

Remember, that hype is usually produced by the early investors and founders themselves for the purpose of inflating that IPO price.

So if you find yourself getting really excited about buying into that hot new stock everyone is talking about the moment it goes public, just remember: All you’re doing is fighting for a chance to make the smart money even richer.

Which brings me to the main point.

The greatest — or, depending on how you look at it, the worst — IPO moment of all time just might be coming in for a landing at a stock exchange near you.

The Most Expensive House in the Worst Neighborhood… And It’s Got Termites

We’ve been hearing a lot of talk about the crown jewel of the Saudi oil empire, Saudi Aramco, taking its shares public for the first time.

Valuation rumors have pegged this company at anywhere between $1 trillion and $10 trillion.

For a bit of perspective, on the high end, that’s about 60% of the GDP of the United States, or about 12 times what we spend on defense every single year.

Never mind that oil prices are the lowest in more than a decade.

Never mind that Saudi Aramco’s flagship oil field, the Ghawar, is rapidly being depleted and may possibly not last another decade.

Never mind that every OPEC member has routinely cooked the books on its oil reserves, at one point doubling official proved reserves figures without providing a shred of substantiating evidence (just look at the table below and pay attention to the circled numbers).

Never mind that the entire developed world, it seems, is now hell bent on finding new methods for powering industry and transportation.

And never mind that Saudi Arabia is bordered by Iraq, Iran, Egypt, and Yemen — possibly the worst quartet of neighbors one can imagine having — and that ISIS is now eyeing the kingdom’s riches and young men in its quest for regional domination.

The Biggest IPO Ever? Or Biggest Pump and Dump?

If this IPO does see the light of day and manages to generate a first-day market cap of $1 trillion, it will be the biggest IPO valuation ever by a factor of more than six (Alibaba currently holds the record at $155 billion, which it earned on its first day in September 2014).

And remember, that’s the low end of its expected valuation. It could, at least based on the talking heads, be 10 times that high.

It would also be more than twice (or 20 times, if you go with the high end of the valuation spectrum) the value of the current biggest publicly traded oil company, Sinopec (NYSE: SNP).

Topping it off, the likeliest candidate for an exchange to list this stock, right now at least, is the Saudi Stock Exchange — whose total market capitalization at the moment is just $400 billion.

Not exactly the best environment for retail investors to take a bite, even if they wanted to.

Put that all together, and the result is anything but prospective… But if you’re still not convinced, ask yourself this:

Just how much room for growth is there in a company that, based on its own metrics, is already the biggest ever, not to mention operates at a point in history when its business model is on the way out?

Wouldn’t it be smarter to find almost any other company with a viable, future-oriented business model than investing in something that, by all accounts, has little to no room for growth?

The answer is obvious…

And yet somewhere out there, thousands of drooling retail investors are waiting, hoping, priming themselves for a shot at what will be the biggest and quite possibly most overhyped IPO of all time.

Personally, I never had this much interest in making other people rich — especially the kind of rich people who already own their own personal Boeings, their own personal harems, and may or may not be sympathetic to the fanatical serial beheaders we see muttering religious tripe, from behind black ski-masks, on the Internet every day.

Follow the Money

So why IPO at all, then?

Well, there is always the most obvious reason.

Sometimes, when early investors and owners see the writing on the wall, their first instinct is to jump ship.

But you can’t just jump off a ship this big without taking a major loss, so the best thing to do might be to convince the masses to take your flea-infested mutt in for the weekend and use that time to run away as quickly and as far as possible.

With a failing business model, dwindling reserves, a declining political environment, and a constant stream of jumbo jet-sized bills to pay, a good IPO might be just what the doctor ordered.

Only problem is, this isn’t the medicine you want; it’s the medicine that the Saudi royal family and its cohorts need.

So what’s the right move when it comes to this record-breaking future IPO?

Just as the case is with the explosion of a hydrogen bomb, the best advice is to get as far away as possible, shield your eyes for the first split second, and then sit back and watch the fireball consume everything.

This isn’t an investment. It’s a parachute for the Saudi elite, and you don’t want to be the one paying for it.

Fortune favors the bold,

Alex Koyfman

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