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The debate over the best way to take a company public has raged for decades in Silicon Valley, but it feels like we may be reaching a turning point.
The traditional IPO method relies on Wall Street bankers to divine an initial price and gather investors. An occasional twist uses a Dutch auction to set the price (as Google did). Then the direct listing method relies on bankers a lot less and the market a lot more (Spotify, Palantir). And lately we’ve seen a boom in the special purpose acquisition company merger, once considered a sketchy technique but now mainstream (DraftKings, Fisker).
Into the debate comes Airbnb and Doordash, a couple of recent initial public offerings using the traditional method that made headlines for the wrong reasons.
Doordash sold 33 million shares at $102, raising about $3.3 billion. But its shares opened for trading at $182. That extra $80 per share, in theory, would have added another $2.6 billion in the company’s coffers if its bankers had been more aggressive.
Airbnb sold 51.5 million shares at $68, raising $3.5 billion. But its bankers may have left even more than that on the table. Its shares opened at $146. The difference would have generated another $4 billion or more for Airbnb.
Some first-day “pop” is said to be desirable to keep investors coming back for future IPO deals. And bankers are humans, with all the imperfections that entails. Pushing the initial price too high may also scare away investors and cause excessive volatility. My former colleague and CNBC commentator Michael Santoli noted that IPOs for companies like Uber and Zillow traded below their initial price at first. “There’s no transcendent, enduring wisdom contained in the initial print,” he tweeted.
But even with all the asterisks and excuses and what not, something is clearly amiss when a company leaves a theoretical $4 billion on the table, enough to qualify as one of the 20 or so largest U.S. tech IPOs ever and more than Goldman Sachs, co-manager of the Airbnb deal, raised in its own mega-IPO 20 years ago.
Some people are also worried that we’re entering 1999-ish speculative bubble territory, including BlackRock CEO Larry Fink. “Is the market pricing in too large of a forward growth rate for these companies?” Fink asked rhetorically on Friday at a virtual tech event, and then answered: “There are going to be many accidents.”
Another shocking consequence: Roblox and Affirm are delaying their IPOs, pointing to the pricing issues with the DoorDash and Airbnb deals. “Based on everything we have learned to date, we feel there is an opportunity to improve our specific process for employees, shareholders and future investors both big and small,” Roblox CEO David Baszucki wrote to his employees explaining the delay, the Wall Street Journal reports. In all my years following IPOs, I can’t remember a time when deals were postponed because the market was too strong.
One simple solution may be to sell more shares. Airbnb sold 51.5 million shares but 70.4 million traded on the first day. Overall, the company’s fully diluted share count (including unexercised options and other contingent shares) is around 700 million, so it could have enlarged the deal pretty easily. When too many investors are clamoring for too few shares, the result is the giant share price jump, the bad look of money left on the table, and general unhappiness in the board room. Maybe even bigger deals are the solution.