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The debate over how best to make a company public has been raging for decades in Silicon Valley, but it looks like we may be reaching a turning point.
The traditional IPO method relies on Wall Street bankers to guess an initial price and bring investors together. An occasional twist uses a Dutch auction to fix the price (like Google made). Then, the direct quotation method relies much less on the bankers and on the market much more (Spotify, Palantir). And lately we’ve seen a boom in the merger of special purpose acquisition companies, once considered a sketchy technique but now commonplace (DraftKings, Fisker).
In the debate, Airbnb and Doordash, a few recent initial public offerings using the traditional method that grabbed the headlines for the wrong reasons.
Doordash sold 33 million shares at $ 102, raising around $ 3.3 billion. But its shares were opened at $ 182. That extra $ 80 per share, in theory, would have added an additional $ 2.6 billion to the company’s coffers had its bankers been more aggressive.
Airbnb sold 51.5 million shares at $ 68, raising $ 3.5 billion. But his bankers may have left more than that on the table. Its shares opened at $ 146. The difference would have generated an additional $ 4 billion or more for Airbnb.
Some day one “pop” would be desirable to keep investors coming back for future IPO trades. And bankers are human, with all the imperfections that entails. Pushing the initial price too high can also scare investors away and cause excessive volatility. My former colleague and CNBC commentator Michael Santoli noted that IPOs of companies like Uber and Zillow were trading below their initial price at the start. “There is no transcendent and enduring wisdom contained in the initial impression,” he tweeted.
But even with all the asterisks and excuses and everything in between, something is clearly wrong when a company leaves notional $ 4 billion on the table, enough to qualify as one of the 20 largest IPOs in the states. -United in the world and more than Goldman Sachs, co-manager of the Airbnb deal, raised during its own mega-IPO 20 years ago.
Some people are also concerned that we are entering the territory of the 1999 bubble, including Black rock CEO Larry Fink. “Is the market price too high a forward growth rate for these companies?” Fink asked a rhetorical question Friday at a virtual tech event, then replied, “There are going to be a lot of accidents.”
Another shocking consequence: Roblox and Affirm delay their IPOs, highlighting pricing issues with the DoorDash and Airbnb offers. “Based on everything we have learned to date, we believe there is an opportunity to improve our specific process for employees, shareholders and future investors, large and small,” wrote the CEO of Roblox, David Baszucki, to his employees, explaining the delay, the the Wall Street newspaper reports. In all the years since the IPOs, I can’t remember a time when trading was postponed because the market was too strong.
A simple solution may be to sell more shares. Airbnb sold 51.5 million shares, but 70.4 million were traded on day one. Overall, the number of fully diluted shares of the company (including unexercised options and other conditional shares) is around 700 million, which could have broadened the deal quite easily. When too many investors demand too few stocks, the result is a giant leap in stock prices, the bad look of the money left on the table, and general discontent in the boardroom. Maybe even bigger deals are the answer.
Aaron Pressman
@ampressman
aaron.pressman@fortune.com
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