Dole IPO sours right out of the gate

Dole Foods IPO priced well below the expected range, and the shares continue to fizzle

By InvestorPlace Oct 27, 2009 10:11AM

This article is by InvestorPlace's Jamie Dlugosch


Perhaps the little guy is finally catching on to the games that Wall Street loves to play.


Last Thursday, Dole Foods (DOLE) priced its IPO at $12.50 per share, well below an expected range of $13-$15 a share. Based on that, you might have expected it to move higher when shares opened Friday morning.


But investors sensed something sour in this offering, and it wasn't the pineapple. Shares fizzled from the start and closed down fractionally; they sat at $12.20 at Monday's close.

That's not a huge loss, but it's far from IPO glory. And it reflects the caution that all investors need to have right now.


Dole has been off the market for six years, since private owners took its shares off the market. The private holders of the company no doubt hoped someone would be out there clamoring for shares.


But the discount we see here to the expected pricing range suggests that the rules of the IPO game may be changing.


In the old days, Wall Street would price IPOs in a way that all but guaranteed immediate profits for those allocated shares in the deal before the start of public trading. A long sales pitch consisting of road shows and careful study helped all but the worst IPOs shoot up when they the market. Those initial shareholders could cash in almost from day one.


Today, that pricing model is all out of whack. Investors are cautious about deploying capital on a stock that may be trading on hype. Sellers are no longer interested in leaving money on the table for greedy buyers of IPOs who trade and trade as prices go up and up.


As a result, there is a vacuum in the IPO market that causes most IPOs to now go bust, even if they represent solid businesses. That's why I recently suggested that investors consider buying busted IPO's instead of newly minted shares.


There is a deep pool of orphaned IPOs that fell in price after becoming public companies. These busted IPOs trade for lower prices for any number of reasons. In many cases, it is the market that is damaged, and not the company. 


Dole's problems have more to do with market mechanics instead of inherent value. In addition to pricing the IPO, the chairman of the company, David Murdock, was simultaneously selling an unrelated convertible debt deal that may have confused investors about the company's real worth.


It was Mr. Murdock who took Dole private in a heavily leveraged deal a few years ago. Proceeds from the IPO are being used to pay down some of that debt.


The company’s finances are a lot more complex than selling fruits and veggies, and investors appear to be saying not so fast.


That caution is exactly what is needed in this environment. While it would be easy to get sucked into the IPO game, given the bullishness of stocks right now, investors are better served waiting for a better price.


I would stay away from DOLE until the dust settles and check out busted IPO's instead.


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