By: Dexter Braff
If your highly paid advisors just cost you a cool quarter of a billion dollars, you probably wouldn’t be very happy.
So why were the founders of Dropbox smiling ear to ear when their stock, which had just been sold at $21.00 per share, opened trading on the New York Stock Exchange at nearly $29.00, nearly 40% above the IPO price?
After all, with 36 million shares offered, the eight bucks per share left on the table could have netted the company $288,000,000 more than the $756,000,000 it actually took in.
For the 99%, a misfire of this magnitude would get you, well, fired.
But the for the 1%, it wasn’t a miss. It was a “market pop” that, contrary to being derided, is practically a goal itself.
Readers of BRAFF onPOINT may recall we wrote about this wackness when SnapChat went public, “If We Performed as Well as SnapChat’s Bankers Did, You’d Sue Us.”
But with another high-profile IPO going snap, crackle, pop almost a year to the day after Snap, we couldn’t help but get our rant on again.
Now, we know. The bankers will solemnly intone that “you must avoid a ‘dead’ IPO at all costs. If share prices drop, it’s a disaster.”
Well, not for the company that got more for the shares than they were arguably “worth.”
And not necessarily for investors with investment life cycles longer than a mayfly (remember the “disastrous” Facebook opening when the stock fell sharply from its IPO price of $38.00? Just before Cambridge Analytica, it was trading at just under $160.00, a 27% annual return).
Now, we’re not completely insensitive to the fact that bankers must strike a delicate balance between pricing the shares and getting them all sold.
But you’ve got to wonder why the Wizards of Wall Street don’t seem to be the least chagrined when the first day rise is so large that it strains the credibility of the “get-the-stock-moving-in-the-right-direction” pricing rationale. On the contrary, they – and the financial press – go ga-ga at the go-go.
Well, perhaps it becomes a bit clearer when you consider this little ditty. Bankers typically allocate IPO shares to their best institutional clients so that they can be rewarded for their business and loyalty with instant gains “baked-in” to the offering – a bonus from the banker, paid entirely from proceeds the selling company forwent by pricing the shares too low. Hmmmm.
So why, you may ask, do the principles and board members of the company going public seem to play along so willingly?
It’s quite simple.
You have to go pretty far downstream to find someone animate that actually loses.
In most cases, the majority of the shares being tendered are by the company itself so the principles and board members (that are typically allocated shares) are not hurt by the underpricing (or at least not too much if they sell some of their holdings). They can sell the bulk of their shares after “lock-up” periods of six months or more expire – in the secondary market where the “pop” has, well, already popped.
We know it works for the institutional investors that get in on the initial offering.
The investors that purchase the shares in the post-IPO market? Well, they may not have gotten the discount, but they’re paying what the market will bear, just like any stock.
And it certainly doesn’t cost the bankers. In addition to their fees, they get to play Santa Claus without it costing them a dime.
One loser is the Company – but, except in the minds of the Supreme Court – the company isn’t a person, but that’s an entirely different rant.
Of course, way, way, downstream, there’s the employees of the company, or the company’s vendors, who may have gotten raises or more job security with the extra capital.
But, you know…