Celebrating One of the Greatest IPOs of All Time


On this day in economic and financial history...

"In over-the-counter trading, Microsoft rose $7, to $28, on its first day of trading." Where were you on March 13, 1986, when one of the greatest IPOs of all time barely merited a mention in the nation's newspapers? The Microsoft IPO, which set Bill Gates on the path to wealthiest-man-in-the-world status and established the company behind MS-DOS as a serious contender, earned only one sentence from The New York Times on its first day on the market -- and not a word from the other major American papers. However, the event attracted greater notice when Fortune magazine featured it in a July issue that year:

Going public is one of capitalism's major sacraments, conferring instant superwealth on a few talented and lucky entrepreneurs. Of the more than 1,500 companies that have undergone this rite of passage in the past five years, few have enjoyed a more frenzied welcome from investors than Microsoft, the Seattle-based maker of software for personal computers. Its shares, offered at $21 on March 13, zoomed to $35.50 on the over-the-counter market before settling back to a recent $31.25. Microsoft and its shareholders raised $61 million. The biggest winner was William H. Gates III, the company's co-founder and chairman. He got only $1.6 million for the shares he sold, but going public put a market value of $350 million on the 45% stake he retains. A software prodigy who helped start Microsoft while still in his teens, Gates, at 30, is probably one of the 100 richest Americans.

The wonder is that Microsoft waited so long. Founded in 1975, it is the oldest major producer of software for personal computers and, with $172.5 million in revenues over the last four quarters, the second largest after Lotus Development. Microsoft's biggest hits are the PC-DOS and MS-DOS operating systems, the basic software that runs millions of IBM personal computers and clones. The company has also struck it rich with myriad versions of computer languages and a slew of fast-selling applications programs such as spreadsheets and word-processing packages for IBM, Apple , and other personal computers.

By 1986 it was becoming clear that the IBM PC model would dominate the personal-computing industry. Thanks to an easily reverse-engineered design, the PC and its clones had displaced the Commodore 64 by 1984 and would capture more than half the market by the end of 1986. Apple, which had gone public in 1980 to greater acclaim and more widespread public interest, saw its shares sink below their IPO price by the time Microsoft debuted. Apple's shares were then suffering the aftermath of Steve Jobs' ouster and the reality of persistently low market share in a fast-growing industry. Microsoft, on the other hand, was already well-established as a profit gusher, posting a net margin of up to 34% in the period leading up to its IPO.

Microsoft was only a few months removed from the launch of Windows 1.0 and would release the first iteration of its massively popular Office productivity suite four years later. The Office launch coincided with the release of Windows 3.0, which was the beginning of Windows' dominance. These popular programs catapulted Microsoft's shares to a 1,300% gain in its first five years on the public markets -- but this was only the start. Windows 95 became the catalyst for another 350% share-price gain in the following five years.

By the time Microsoft celebrated its 13th IPO anniversary in 1999, shareholders from day one had enjoyed a 41,000% gain on their initial investment. Microsoft topped out at an all-time maximum gain of more than 60,000% at the height of the dot-com boom, with a market cap of more than $600 billion. Adjusted for inflation, Microsoft remains the largest American company in history, and its staggering post-IPO success -- shares had still returned more than 28,000% two decades after the IPO -- makes it one of the most successful public debuts of all time. That's not on the basis of IPO proceeds, but in long-term shareholder returns. And, yes, that's far better than Apple's 20-year performance. At the same point in its public life, the iPhone maker was only a three-bagger.

Good as gold
The price of gold reached $1,000 per ounce for the first time on March 13, 2008. This should have been no surprise, considering the debt-fueled economic slowdown then underway, which the Federal Reserve (and other central banks) had been attempting to combat through lowered interest rates. However, gold had begun rising early in the new millennium with relatively little slack even during a period of supposed economic strength. UBS metal strategist Robin Bhar told CNNMoney: "The current environment is such that the doom and gloom scenario plays right into investors' hands. ... Though forecasts point to no recession, hedge fund clients are quite fearful right now."

The National Bureau of Economic research would later confirm that a recession was then already underway. Even the end of that recession did little to halt the rise of gold, which topped out at nearly $2,000 per ounce in 2011. Only the post-Nixon gold bubble of the 1970s surpassed the growth of gold over the first decade of the 21st century, as its inflation-adjusted peak was near $2,500 per ounce in early 1980.

Oil must flow
Leaders of the Organization of Petroleum Exporting Countries, or OPEC, finally lifted their crippling embargo against the United States on March 13, 1974. The embargo, enacted the previous October, had been a measure of revenge against the U.S. for its support of Israel in the Yom Kippur War. American peace initiatives seemed enough to assure Arab ministers that they had seized the upper hand against Israel and its allies after failing to do so with a surprise attack.

The embargo had indeed been a terrible vengeance: A barrel of oil quadrupled in price, from $3 to $12, over the course of the embargo. This action, and President Nixon's 1971 decision to take the U.S. off the gold standard, combined to create one of the worst postwar economic climates. The Dow Jones Industrial Average lost 45% of its value during a highly inflationary bear-market period, but most of the decline actually occurred after the embargo lifted, as the economic impact took some time to work its way through the American system.

The triumphant conclusion of OPEC's embargo proved to be the high point of the organization's power. Another oil price shock at the end of the 1970s came as a result of instability and war in Iran, which was not part of the cartel. Shortly after Iran again stabilized, the world entered a period of oil surpluses that pushed prices down to historic lows. The 1973 embargo was a short-term success, but in the long run it had forced other nations to explore for oil more intently and focus more on energy efficiency initiatives. A decade after the embargo ended, the U.S. was importing less than 30% of its oil, which was a substantial decline from the near-50% importation rate it had sustained during the oil-scarce 1970s.

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The article Celebrating One of the Greatest IPOs of All Time originally appeared on Fool.com.

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