IPOpalooza

Audio Length: 00:53:00

https://dcs.megaphone.fm/SLT7523272380.mp3

Transcript:

S2: Hello. Welcome to the IPO palooza edition of Slate Money, your guide to the business and finance news of a week in which we had monster IPO activity.

S3: I’m Felix Salmon of Axios. I’m here with Emily Peck of Huff Post. Hello. I’m here with Anna Shamansky of Breakingviews. Hello. All three of us were left out of the coveted IPO allocations for door Dash and Airbnb. And we feel sad about that because we would have made lots of money if we had managed to get some of those allegations. We are going to talk about whether we are sad about that and what should be done about it and whether it’s even a problem. We are also going to talk, of course, about the massive government antitrust suit against Facebook. And we are going to talk about the way that the covid vaccine is being distributed and whether it’s fair and or economically optimal. All of that coming up on Slate money. So the big news this week, and it was IPO frenzy, we had an amazing off the charts IPO door dash, which was then followed by an even more amazing, even more off the charts IPO for Airbnb. What is going on? Bring us up to speed.

S1: Yes. So this is part of the IPO palooza that we’ve seen this year, just a enormous record amount of issuance. And what was really notable about these was how much the stock popped on the first day in Airbnb case, you know, more than I believe, more than doubled and Dorda almost doubled.

S3: And what that means is that a whole bunch of like big institutional investors bought a whole bunch of stock, basically of the 50 percent discount to the market price. And when I say a whole bunch of stock, I mean three and a half billion dollars worth of stock in both cases. So if you are a big institution, if you’re a fidelity or something like that and you manage to get in on the IPO, then you are just sitting on literally probably hundreds of millions of dollars of free money for doing nothing except for saying, yeah, I’ll buy some of that.

S1: Yeah. I mean, actually, it’s interesting that you mentioned Fidelity, because I actually think part of the reason we’re seeing these huge pops, there are a lot of reasons, but partly is because you have now just these enormous firms. You have Fidelity and BlackRock that are taking up so much of like when they’re originally building the book for the IPO, they are taking up so much of that. So in the past, you obviously had lots of institutions that were getting in on these IPOs. Now, not as many of those 10. So consequently there.

S3: Why not? What’s the reason for that? Why why aren’t there so many institutions these days?

S1: Because you right now, if I may if I’m a company, that’s IPO ing. If I’m the investment bank that’s doing it, I can basically with essentially like two or maybe three firms almost entirely build most of my book. I don’t need to go out to a bunch of different firms.

S3: So the underpricing of IPOs, if that’s what we’re seeing right now, is basically investment bank laziness that they they can it’s not quite easily with two two phone calls and they don’t need to go to anyone else.

S1: It’s not laziness. It’s also just, you know, these firms have also taken in so much money. So it’s not laziness. It’s like, why would you and also like why would you screw over these firms who are these enormous firms that tell them they can’t have the allocation they want where it’s a kind of in the best interest of everyone to have that?

S3: OK, so I want to bring Emily in here, but it’s clearly not in the best interests of everyone is clearly that if you allocated the stock according to more or less how it’s allocated now in the market, you could have got twice as much money for it. So the company loses out on three and a half billion extra dollars that it could have got by allocating the stock more broadly. And in a sense, everyone who isn’t smart enough to be invested in the funds that BlackRock and Fidelity that managed to get this big pop they lose out to.

S1: No, I mean, I actually kind of disagree with the idea that, well, if you if this was done in a different way, then you would still have the same price. It just, you know, you wouldn’t have this kind of lower price and then a pop, you would just have that quote unquote, market price. And I don’t think that’s true because I think part of what we’re seeing is not something based on some fundamental reality. It’s you have a lot of demand, especially because we keep seeing these frothy IPOs. That means more and more people want to get in at the same time that when you’re talking about these, like when you’re initially floating, not a lot of shares are necessarily being traded. You have a lot of these firms that are holding that can’t sell yet. So you don’t have a lot of people that are excited to sell. You have a lot of people that want to buy. So consequently, you’re going to get an I would say probably an artificial pop that probably eventually will come down. So, yes, you can say, well, if I were Jordache or Airbnb, could I have priced higher? Yeah, you probably could have. I’m not saying you could price where it is now, but yeah, you probably could have priced a little bit higher. But I don’t think that narrative of like, oh, well, they could have priced exactly where the market is now and it would have been exactly the same. I don’t really buy that.

S3: Well, I think this is a little bit of a straw man. I don’t I wasn’t coming out and saying they could have to exactly where it is now. What I’m saying is that. There are clearly losers here as well as winners, and there are absolutely winners and the winners are the people who are lucky enough to get those IPO allocations. And they made an enormous amount of money on basically zero effort. And we are talking literally billions of dollars for each of these stocks, the amount of money that they made for zero effort. Why is that efficient? How does that make sense? Emily, does it make any sense to you?

S4: No, it doesn’t make any sense to me. I have a lot of questions. But the first one is, isn’t it just bottom line, good for Airbnb if its stock is worth a lot of money, more than they anticipated, even if they left that the three billion dollars on the table long term, everyone always wants a pop. Like if you don’t have the pop, people are like, oh, no, the IPO was kind of like a bust and it didn’t do that well, like, prices just kind of stayed where they were initially. People usually complain about that. You mean like Facebook?

S3: Yeah, people usually say, like, I didn’t go so well, it didn’t go so well, didn’t really cause it any kind of long term harm. But yeah, I mean, it is an interesting question as to the degree to which a high share price is good for the company. It’s obviously good for the company if they if they can issue more shares that, you know, if the cost of equity goes down. So it’s obviously good for Tesla. Tesla just announced that they were going to sell another five billion dollars worth of shares because their share prices so high, the dilution is low. Basically, it doesn’t cost it costs almost nothing to issue five billion dollars worth of shares for those companies who are still issuing new equity. Having a high share price is great. If you’re wanting to buy another company with an all stock deal or even the partially stock based deal. And having a high share price is great. Other than that. And what’s that? What’s the advantage of a high share price?

S1: Well, you certainly want your share price to to be increasing because it’s not just a matter of like when you’re going to the equity market, your IPO and you’re taking cash, it’s not like that’s the last time you’re going to need cash. Companies are constantly needing cash. Also, they’re constantly often borrowing at the same time that they may also have equity infusions. And what your stock is doing is going to affect your other borrowing costs. Companies are constantly rolling over the loans. They’re constantly shifting money around. And especially if you’re talking about a company like Dorda that just burns through cash, they definitely want their share price to be increasing. They definitely don’t want there to be a situation where there is a it’s massively overvalued and then it just collapses. And then all of a sudden they have a harder time. A year, obviously, then would be issuing for it’s going to be more expensive for them to issue equity. It also means is going to be more expensive for them to borrow. It also means they’re going to have to be more risk averse than some of their other competitors.

S3: It’s kind of intuitive and easy to understand why a company would want its share price to be going up. And I totally understand the idea that an increasing share price is is a good thing. But there’s a difference between the high share price and an increasing share price. And on some level, the intuition surely has to be if you start trading at a gazillion dollars at a crazy high share price, then it’s harder to have an increase.

S1: Oh, no, I agree with you. I actually think that’s why partly I would imagine some of these companies did, quote unquote, leave some cash on the table initially because I think they were also nervous about their share prices being too high. Now you want to pop, but if you have a pop that puts you in a place where you’re just simply not going to be able to increase after that. No, I agree with you. I actually don’t think that’s a good thing long term.

S4: That’s the first thing that’s made sense to me, actually, is that it’s too high and that sets up unrealistic expectations and kind of sets up a bubble essentially for these companies because they’re never going to meet the expectations, maybe especially a company like Dawidoff.

S3: I mean, that’s what Elon Musk has been saying, too. He came out, I think, last week and said, guys, we have a crazy high share price. And I’m not complaining about having a crazy high share price. And it’s good for us. And it does mean we get to issue new equity, very cheap, but it also means that we are priced for absolute perfection. And if we don’t hit incredible numbers and make lots of money, then our share price has a long, long way to fall. And no one wants to be working for a company where the share price has gone down a lot. So people are nervous. Brian Chesky, the CEO of Airbnb, there’s this wonderful clip on Twitter of him being told where the share price is indicated to open. And he kind of goes speechless for a while. And he’s like, oh, shit. Like on the one hand, he’s now worth 14 billion dollars. On the other hand, he’s like, now I really need to. Execute on expectations that are not anything that I have placed on myself. It’s not like the board has told me you need to make this enormous amount of money. You need to be successful. It’s not like that’s in my strategic plan that I need to be that successful. But somehow stock market investors are like, hey, you have to completely exceed whatever maybe the board has told you that you need to do. Otherwise, we’re going to punish you by selling your stock. And it, again, has a huge, huge amount to fall. It’s worth more than all the big hotel companies put together. Now with much less revenue, it has less revenue than they do like even in the pandemic.

S4: One thing that was interesting and maybe Anna can can talk about this some more, Bloomberg reported that one of the reasons the stock pop so much on Airbnb was retail investors and pandemic, you know, demand. People are at home with their Robinhood apps and they want to get it on like the latest IPO. And that’s part of the reason the stock went so high.

S3: So so I want to jump in on this one, because this is I think it goes back to something that Anna was saying about the big institutions, the BlackRock and the Fidelities being like the players. And if you are an investment bank leading an IPO, it is very easy to call up BlackRock and Fidelity and say how much of an allocation do you want? How much are you willing to pay? It is very hard. It is basically impossible to phone up Robin Hood and say, can I give you an IPO allocation? Trying to reach individual retail investors used to be something that certain investment banks could do if they had a bunch of retail clients of their own. So if you had like, say, Dean Witter, for instance. Right. If you are an IPO bank, you would phone up Dean Witter. Dean Witter would have a sales force of individual stock brokers who would phone up their individual clients and say, do you want in on the Airbnb IPO? And this is a big thing back in like the dotcom bubble in 1999 and 2000, the individual stock brokers would get allocations of hot IPOs. And if you were a good client of the brokerage house, you would get an allocation of like 50 shares, 100 shares or whatever, and then you would make money yourself as an individual investor in the IPO. I can’t remember anyone sort of talking about individual investors investing in IPOs. In twenty twenty, in a way that was actually quite a big thing back in like nineteen ninety nine and that’s a big change and it does make it feel like there’s something incredibly sort of undemocratic about the IPO process now even more than it was in 1999, because at least 99, it was possible for some individuals to see this pop into in 2020 is basically impossible. Am I right. Anna.

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