A general reading of an initial public offering is that if the price goes up strongly from the offer, then this is a success. We should be reading this entirely the other way around. A fall in the price with those gaining more than the market price after a sale is a success. Because, you know, they’re selling something.
Think it through for a moment:
Shares in Lyft (NASDAQ:LYFT) soared on Friday as Silicon Valley’s first major flotation of the year demonstrated red-hot investor demand for a new wave of technology listings. The taxi-hailing app company was valued at as much as $30bn (£23bn) as shares rose 21pc on its market debut. The success of the initial public offering (IPO) is set to open the floodgates for companies including Uber, Pinterest, Airbnb and Slack to test investor appetite in the coming months with an unprecedented series of major listings.
If you’re selling something, would you prefer to sell it for $21 billion, Lyft’s valuation for the IPO? Or for $30 billion, the valuation after the pop?
Now think through if you’d just paid the people doing the selling for you 7% of the sum raised to do that selling. And you find they’ve sold it today for 30% less than it’s worth tomorrow?
Quite, you’re not going to be greatly happy; you might even think that’s a bit of a failure.
It also works the other way around. If Lyft had gained that new money – whatever combination of new stock sold by the company and that by older stockholders – at the $30 billion valuation, and after it was over, the value fell to $21 billion. Then you’d say your bankers had done very well for you, you’d gained yesterday 30% more than it’s all worth today. Their 7% fee was well-earned.
The obvious point being that success or failure as defined by those selling the stock is the opposite, the inverse, of what is that success or failure to us buying it.
OK, so far that’s just a linguistic and logical complaint. But it does matter as to what’s going to happen in that coming pipeline of IPOs. We have indeed got Uber (UBER), Pinterest (PINS), Slack (SLACK), Airbnb (AIRB) to come. And believe me, their version of success is as I’m putting it. Higher is better, no pop is better. Even, selling for a higher price than prevails after the IPO is better.
So what is going to be true of the pricing of those other tech IPOs to come? It’s going to be much closer to a full valuation at the very least, isn’t it? They’re going to be able to say hey, look at the Lyft pop, we should be selling at a higher multiple, at the top end of the range. Which, given that our own interests are the inverse, means that they’re all going to be much less of a deal for us.
Which is one of the oddities of this IPO market. The very fact that we buyers have done well out of one means that the next few are highly likely to be less rewarding to us. Just because, as should be obvious but isn’t given the language and logic used, our interests as buyers are diametrically opposed to those of the people doing the selling.
That Lyft had a decent pop means we should be more, not less, skeptical of valuations for future tech IPOs.