5 ms·

When IPO shares soar ... it's not always a good thing: http://www.nytimes.com/2011/05/21/opinion/21nocera.html http://www.nytimes.com/2011/05/21/opinion/21nocer

by jawns 11y ago

When IPO shares soar ... it's not always a good thing: http://www.nytimes.com/2011/05/21/opinion/21nocera.html http://www.nytimes.com/2011/05/21/opinion/21nocera.html "As Eric Tilenius, the general manager of Zynga, wrote on Facebook: 'A huge opening-day pop is not a sign of a successful I.P.O., but rather a massively mispriced one. Bankers are rewarding their friends and themselves instead of doing their fiduciary duty to their clients.' " EDIT: I just noticed that this op-ed was published four years ago to the day!

tedsanders 11y ago
So true. It's bizarre how journalists report on IPOs. I imagine it comes from the search for an easy narrative (e.g., "Investors raced to shop for SHOP"), but these narratives always miss the point that a pop indicates underestimated demand, not high demand. Suppose I took Facebook public and sold the company for $10 to my friends, who turned around and sold it for $10 billion. The stock would have experienced a billion-fold IPO, but Facebook would not be happy that they only got $10. The bigger the IPO pop, the more money your company left on the table. Here's an article I wrote a year ago discussing this very issue: "IPOs: The one topic journalists always get wrong" http://www.tedsanders.com/ipos/ http://www.tedsanders.com/ipos/
- bickfordb 11y ago
  It seems like this is a good argument for not going public. You have to pay a 5% tax to bankers and sell shares to institutional investors at what often appears to be a 50% discount
  - Scoundreller 11y ago
    But liquidity is valuable, and may be worth all the costs. The average P/E ratio for the stock market is ~15, while a small private business will only have a ratio of 3 or 4.
    - cma 11y ago
      You can't compare the average nonpublic company with the average public company to come to the conclusion that companies should go public. You are including small plumbing businesses, etc. That realistically will never have a chance to go public, with large businesses that were successful enough to go public.
  - tim333 11y ago
    Or you can follow the Google model and do a Dutch auction.
    - nemo44x 11y ago
      Good luck finding an underwriter willing to do that if you're not a company like Google.
- JonFish85 11y ago
  "Facebook would not be happy that they only got $10." The question I would ask is: "who is it that isn't happy"? Employees? Their stock options are worth the same regardless of what the IPO price is. Investors? Same thing. New investors? They're getting an immediate return. I mean sure, the company doesn't get as much to put in the bank, but ultimately who is upset about that?
  - joshu 11y ago
    Really? Can you think a bit more about this one?
  - dsg42 11y ago
    The company itself, which essentially just lost the difference in cost between the IPO shares and their actual value in cash. Okay, if you want to be really nitpicky, they didn't lose quite that amount. But they did lose a substantial amount of cash. Also, employees are likely hurt indirectly, as they can't sell their stock for 90 days. Underpriced IPOs flood the market with stock, potentially causing the price to collapse (as in the case of LendingClub) before they get to cash out.
paulpauper 11y ago
the quants who study this stuff find that first-day performance is not always predictive of future success/failure. For every Zynga burnout, you have stocks like Zen Desk, Linkedin or Google that keep going up after their IPO pop.
- nemo44x 11y ago
  I remember when Workday (WDAY) had its expiration coming up and there was a lot of speculation the stock would tank that day. The float was pretty small before the lockup and the thought was because of this the price was very inflated. It went down the first 10 minutes of trading but shot right back up as large buyers were waiting to see the price action that day and bought it up. The stock is up 75% or so since the lockup 2 years later. If it were as easy as shorting IPO's (or going long PUTS) near lockup, I'd be a billionaire. As you've pointed out - it's impossible to know what will happen, if anything (making a spread unplayable too) when the lockup expires.
joshu 11y ago
Some amount of pop increases investor's appetite for participating in IPOs, I think. Hurts the specific company but might be good for the ecosystem. But 51% feels like a mispricing.
- manyhats 11y ago
  In this environment, it's very difficult to price IPOs "correctly". I'm no longer involved in that aspect of the business, but I was in the late 90s, and the same thing happened back then. Basically, in a "normal" market, you'd have your company A, and comparables B, C, and D. B, C and D trade for an average of 20x earnings. So you'd price A at the traditional 15% discount for general IPO risk (unknown issuer, etc.) and it would go to the initial investors at a 17x earnings multiple (let's say it had earnings per share of $1), or $17. The initial investor would have the expectation that it would trade up to $20 in the near term. In the late 90s though, when nearly all tech-related IPO'ing companies didn't make any money, most everything traded on revenue multiples. So when your comps B, C, and D were burning cash and were expected to continue to lose money for the next few years, and traded for 8x revenues, 12x revenues and 10x revenues, well the best the traditional theory had was to say you would take the discount off the mean. The problem was that traditional valuation metrics (earnings, cash flow) had no bearing on the price of the stock, so if 12x revenue for a cash-burning business was valid, why not 14x or 16x or more? Your 10x average revenue with a 15% discount could take your IPO multiple of 8.5x to more than double that. It was impossible to accurately predict the first-day pop, and I imagine the same is true today. No one wants a "failed" IPO though, so everyone tends to err on the side of caution and will generally be willing to give a greater discount to ensure that the stock doesn't break IPO price in the first month. Especially if there's not a traditional valuation that makes sense on the business (trailing/current profits or cash flow). As hard as it is to believe, things are better these days. http://www.ritholtz.com/blog/2011/05/first-day-ipo-pops/ http://www.ritholtz.com/blog/2011/05/first-day-ipo-pops/
pbreit 11y ago
I hate, hate, hate this sentiment. Pricing IPOs is not a perfect science. You want at least a 20-30% pop to generate enthusiasm. So it actually was 50%. It's not that big a deal. Plus, I can easily envision it falling back a bit in the coming days as the excitement wears off. The big money can be raised in a secondary, but ONLY if the stock isn't perceived as a dud.
- dlubarov 11y ago
  In this case they sold a good chunk of the company, and left nearly $70 million on the table. For a relatively small company, it would be hard to justify that as an investor marketing expense.
  - pbreit 11y ago
    10% is not a big chunk. To leave $70m ($65, actually) on the table they would have needed to price it "perfectly" and it would have been considered a dud. With a strong opening day and a solid few quarters they should be able to float another 10% and pick up $200-300m. And you're worried about $20m or $30m.
- deleted 11y ago
  [deleted]
ChuckMcM 11y ago
As with most things it is somewhat more nuanced. Securities need people to buy them, otherwise they are illiquid and you can't do anything but stare at them :-). So having them go 'up' on their opening day creates a two point trend line that is up and to the right. Of course anyone who has been around for a while has seen that IPOs always come down 6 - 12 months after they go out. Generally that is because regular employees will have a lock out period (so as not to flood the market) and that lockout is between 180 and 360 days. The interesting metric is that depending on when the employee was hired, their option price might be much much lower than what the current selling price is, and they will often make trades "at the market" which is code for put them on the sell side, I really don't care how much they go for. And the market maker will fill that order from the buy side with the sales price going down each time they fill up one tranche on the buy side and move to the next lower one. That pushes the price down, and depending on how many people are selling, potentially way down. So you will see a lot of option activity for "puts" at sales at those points as traders try to capitalize on the 'employee lockout dump'. Of course what the bankers taking the company public do not want to have happen for any reason, is to not sell all of the shares that are in the offering. Often times the bankers will be obligated to buy any unsold shares at the offering price, and if the stock is going down that means the bankers are being forced to buy shares from the client company because nobody else wants to pay that price for them. Generally if that looks likely to happen they pull the IPO like Box did rather than lose money on the transaction. Its these other factors which favors an IPO with a 20 - 50% up tick in price. It means all of the shares will issue without any overhang for the banker, it also makes sure that people are left with a perception of "value" on the stock (just as private financing round that leaves your shares more valuable than before is more positively perceived than a 'down' round where stock price is lower)
- deleted 11y ago
  [deleted]
- manyhats 11y ago
  Adding a little more detail on the mechanics of a typical capital markets raise to your answer, there's an overallotment on the "target" raise, which the bookrunner (lead underwriter) will use to stabilize the price. For example, ABC Inc. wants to raise $100 in an IPO, and intends to sell 100 shares at $1. The underwriters will sell 115 shares at $1 (the extra 15 shares are the overallotment) and the company sells the bank 100 shares and grants the bank the option (but not the obligation) to purchase another 15 shares from the company for $1. One bank from the underwriting syndicate will take responsibility to stabilize the price when the issue starts trading, which means that the initial sellers might be selling to "true" buyers, or if there aren't any above the IPO price, the bank. If the price is above the IPO price once the stabilization period is over (30 days), and the bank hasn't bought back those "extra" 15 shares (in whole or part) during the period, the bank will call the extra shares from the company for $1 to close out their initial 15 share short position from the initial IPO overallocation, and instead of raising $100, the company will have raised $100+overallotment. If the IPO priced too high, the bank will quickly run through its 15 share overallotment trying the stem the stock price fall and you'll see the price break through the IPO price. In this case, the bank naturally will have closed out the 15 share short position, and ABC Inc. will have raised the initial $100.

by jawns 11y ago

tedsanders 11y ago

So true. It's bizarre how journalists report on IPOs. I imagine it comes from the search for an easy narrative (e.g., "Investors raced to shop for SHOP"), but these narratives always miss the point that a pop indicates underestimated demand, not high demand. Suppose I took Facebook public and sold the company for $10 to my friends, who turned around and sold it for $10 billion. The stock would have experienced a billion-fold IPO, but Facebook would not be happy that they only got $10. The bigger the IPO pop, the more money your company left on the table. Here's an article I wrote a year ago discussing this very issue: "IPOs: The one topic journalists always get wrong" http://www.tedsanders.com/ipos/ http://www.tedsanders.com/ipos/

bickfordb 11y ago
It seems like this is a good argument for not going public. You have to pay a 5% tax to bankers and sell shares to institutional investors at what often appears to be a 50% discount
- Scoundreller 11y ago
  But liquidity is valuable, and may be worth all the costs. The average P/E ratio for the stock market is ~15, while a small private business will only have a ratio of 3 or 4.
  - cma 11y ago
    You can't compare the average nonpublic company with the average public company to come to the conclusion that companies should go public. You are including small plumbing businesses, etc. That realistically will never have a chance to go public, with large businesses that were successful enough to go public.
- tim333 11y ago
  Or you can follow the Google model and do a Dutch auction.
  - nemo44x 11y ago
    Good luck finding an underwriter willing to do that if you're not a company like Google.
JonFish85 11y ago
"Facebook would not be happy that they only got $10." The question I would ask is: "who is it that isn't happy"? Employees? Their stock options are worth the same regardless of what the IPO price is. Investors? Same thing. New investors? They're getting an immediate return. I mean sure, the company doesn't get as much to put in the bank, but ultimately who is upset about that?
- joshu 11y ago
  Really? Can you think a bit more about this one?
- dsg42 11y ago
  The company itself, which essentially just lost the difference in cost between the IPO shares and their actual value in cash. Okay, if you want to be really nitpicky, they didn't lose quite that amount. But they did lose a substantial amount of cash. Also, employees are likely hurt indirectly, as they can't sell their stock for 90 days. Underpriced IPOs flood the market with stock, potentially causing the price to collapse (as in the case of LendingClub) before they get to cash out.

paulpauper 11y ago

the quants who study this stuff find that first-day performance is not always predictive of future success/failure. For every Zynga burnout, you have stocks like Zen Desk, Linkedin or Google that keep going up after their IPO pop.

nemo44x 11y ago
I remember when Workday (WDAY) had its expiration coming up and there was a lot of speculation the stock would tank that day. The float was pretty small before the lockup and the thought was because of this the price was very inflated. It went down the first 10 minutes of trading but shot right back up as large buyers were waiting to see the price action that day and bought it up. The stock is up 75% or so since the lockup 2 years later. If it were as easy as shorting IPO's (or going long PUTS) near lockup, I'd be a billionaire. As you've pointed out - it's impossible to know what will happen, if anything (making a spread unplayable too) when the lockup expires.

joshu 11y ago

Some amount of pop increases investor's appetite for participating in IPOs, I think. Hurts the specific company but might be good for the ecosystem. But 51% feels like a mispricing.

manyhats 11y ago
In this environment, it's very difficult to price IPOs "correctly". I'm no longer involved in that aspect of the business, but I was in the late 90s, and the same thing happened back then. Basically, in a "normal" market, you'd have your company A, and comparables B, C, and D. B, C and D trade for an average of 20x earnings. So you'd price A at the traditional 15% discount for general IPO risk (unknown issuer, etc.) and it would go to the initial investors at a 17x earnings multiple (let's say it had earnings per share of $1), or $17. The initial investor would have the expectation that it would trade up to $20 in the near term. In the late 90s though, when nearly all tech-related IPO'ing companies didn't make any money, most everything traded on revenue multiples. So when your comps B, C, and D were burning cash and were expected to continue to lose money for the next few years, and traded for 8x revenues, 12x revenues and 10x revenues, well the best the traditional theory had was to say you would take the discount off the mean. The problem was that traditional valuation metrics (earnings, cash flow) had no bearing on the price of the stock, so if 12x revenue for a cash-burning business was valid, why not 14x or 16x or more? Your 10x average revenue with a 15% discount could take your IPO multiple of 8.5x to more than double that. It was impossible to accurately predict the first-day pop, and I imagine the same is true today. No one wants a "failed" IPO though, so everyone tends to err on the side of caution and will generally be willing to give a greater discount to ensure that the stock doesn't break IPO price in the first month. Especially if there's not a traditional valuation that makes sense on the business (trailing/current profits or cash flow). As hard as it is to believe, things are better these days. http://www.ritholtz.com/blog/2011/05/first-day-ipo-pops/ http://www.ritholtz.com/blog/2011/05/first-day-ipo-pops/

pbreit 11y ago

I hate, hate, hate this sentiment. Pricing IPOs is not a perfect science. You want at least a 20-30% pop to generate enthusiasm. So it actually was 50%. It's not that big a deal. Plus, I can easily envision it falling back a bit in the coming days as the excitement wears off. The big money can be raised in a secondary, but ONLY if the stock isn't perceived as a dud.

dlubarov 11y ago
In this case they sold a good chunk of the company, and left nearly $70 million on the table. For a relatively small company, it would be hard to justify that as an investor marketing expense.
- pbreit 11y ago
  10% is not a big chunk. To leave $70m ($65, actually) on the table they would have needed to price it "perfectly" and it would have been considered a dud. With a strong opening day and a solid few quarters they should be able to float another 10% and pick up $200-300m. And you're worried about $20m or $30m.
deleted 11y ago
[deleted]

ChuckMcM 11y ago

As with most things it is somewhat more nuanced. Securities need people to buy them, otherwise they are illiquid and you can't do anything but stare at them :-). So having them go 'up' on their opening day creates a two point trend line that is up and to the right. Of course anyone who has been around for a while has seen that IPOs always come down 6 - 12 months after they go out. Generally that is because regular employees will have a lock out period (so as not to flood the market) and that lockout is between 180 and 360 days. The interesting metric is that depending on when the employee was hired, their option price might be much much lower than what the current selling price is, and they will often make trades "at the market" which is code for put them on the sell side, I really don't care how much they go for. And the market maker will fill that order from the buy side with the sales price going down each time they fill up one tranche on the buy side and move to the next lower one. That pushes the price down, and depending on how many people are selling, potentially way down. So you will see a lot of option activity for "puts" at sales at those points as traders try to capitalize on the 'employee lockout dump'. Of course what the bankers taking the company public do not want to have happen for any reason, is to not sell all of the shares that are in the offering. Often times the bankers will be obligated to buy any unsold shares at the offering price, and if the stock is going down that means the bankers are being forced to buy shares from the client company because nobody else wants to pay that price for them. Generally if that looks likely to happen they pull the IPO like Box did rather than lose money on the transaction. Its these other factors which favors an IPO with a 20 - 50% up tick in price. It means all of the shares will issue without any overhang for the banker, it also makes sure that people are left with a perception of "value" on the stock (just as private financing round that leaves your shares more valuable than before is more positively perceived than a 'down' round where stock price is lower)

deleted 11y ago
[deleted]
manyhats 11y ago
Adding a little more detail on the mechanics of a typical capital markets raise to your answer, there's an overallotment on the "target" raise, which the bookrunner (lead underwriter) will use to stabilize the price. For example, ABC Inc. wants to raise $100 in an IPO, and intends to sell 100 shares at $1. The underwriters will sell 115 shares at $1 (the extra 15 shares are the overallotment) and the company sells the bank 100 shares and grants the bank the option (but not the obligation) to purchase another 15 shares from the company for $1. One bank from the underwriting syndicate will take responsibility to stabilize the price when the issue starts trading, which means that the initial sellers might be selling to "true" buyers, or if there aren't any above the IPO price, the bank. If the price is above the IPO price once the stabilization period is over (30 days), and the bank hasn't bought back those "extra" 15 shares (in whole or part) during the period, the bank will call the extra shares from the company for $1 to close out their initial 15 share short position from the initial IPO overallocation, and instead of raising $100, the company will have raised $100+overallotment. If the IPO priced too high, the bank will quickly run through its 15 share overallotment trying the stem the stock price fall and you'll see the price break through the IPO price. In this case, the bank naturally will have closed out the 15 share short position, and ABC Inc. will have raised the initial $100.