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Here we go again. You would think that the proliferation of direct and SPAC last year, which allow founders, venture capitalists and large investors to take their would loosen Wall Street’s grip on IPOs – a long-standing boon for investment banks. But in 2020, 194 traditional IPOs, the highest total since 2014, were done the old-fashioned way, with bankers frequently selling stocks at rock bottom prices to their valued clients, who cleaned up of a day one pop parade which sounded among the greatest ever. According to data released by Jay Ritter of the University of Florida, an IPO expert, as many as 12 deals in 2020 left $ 500 million or more “on the table.” In those dozen deals, the owners raised between half a billion and three and a half billion dollars less than if they had obtained the price at which their shares settled at the close of the opening day of the negotiation.
The latest true to form example is the biggest offering yet this year, the Start of Affirm Holdings on Nasdaq January 13. Affirm offers financing for online purchases to customers who do not have a savings account or credit history and who might not otherwise be denied credit. Its founder and CEO is Max Levchin, who started PayPal with Peter Thiel, of which Founders Fund is a major investor.
Initially, Affirm announced in a Jan. 5 filing that it expected major underwriters, Goldman Sachs, Morgan stanley and Allen & Co., to price its shares between $ 33 and $ 38. Eight days later, in its offering prospectus, Affirm revealed that the range had fallen between $ 41 and $ 44. And on January 11, the day before the IPO, Affirm announced in a press release that its bankers had pre-sold the offer for $ 49. Research and consultancy firm IPO Boutique reported that the deal had been “oversubscribed several times, with very strong momentum from the tour.”
The evolution of prices illustrates the main problem with traditional IPOs: pricing is not set by a sale that invites all people and funds interested in the purchase to bid, but rather allows bankers to reserve funds. deals for the hedge funds and the fund manager that give them the most business. “Fat cats get rich milk,” a CEO who took his company public told me. “Many times over-subscribed” is the code language to get a good deal. Freedom doesn’t ring in IPOs. “The system creates a perverse incentive for investment bankers to undervalue the offer,” says another former CEO who has followed the process.
Affirm sold 24.6 million shares at the price of $ 49 per share paid by large investors as part of the offer. After paying its underwriters $ 54 million, or 4.5% in fees, Affirm raised $ 1.151 billion. But on the day it opened, when everyone had a chance to buy, its shares climbed $ 48.24 or 98.4% to close at $ 97.24. So Affirm left $ 1.187 billion (24.6 million shares at $ 48.24) on the table. That’s because it costs $ 1.03 in lost cash (not counting the subscription fee) for every dollar the claim pockets from the offer.
In the big March 2020 IPO, only four newcomers sacrificed more cash than Affirm, Airbnb ($ 3.94 billion), Snowflake ($ 3.75 billion), By Dash ($ 2.9 billion) and Royalty Pharma ($ 1.28 billion). In its prospectus, Affirm reported revenue of $ 510 million for the fiscal year ended June 30 and a loss of $ 113 million. He expects his cash flow to rise to $ 1.67 billion following the offer. Had Affirm got full day one value for its stocks, its war chest would overflow with an additional $ 1.2 billion in reserves to fund its losses and support new investments. At the close on Jan. 13, Affirm’s fully diluted market cap was just under $ 24 billion. This lost money would have increased his net worth by $ 1.2 billion, and therefore likely added $ 5, or 5% to his share price.
Indeed, the Wall Street IPO club works wonderfully. But it’s high time for a lot less wonder and a little more transparency.
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