Did Zipcar Get Swindled on Its Massive IPO?(theatlanticwire.com)
theatlanticwire.com
Did Zipcar Get Swindled on Its Massive IPO?
http://www.theatlanticwire.com/business/2011/04/did-zipcar-get-swindled-on-its-massive-ipo/36681/
16 comments
Auction IPOs are supposed to fix this problem, although I suppose clueless buyer's remorse could lead to a first-day drop in such a case.
It's very hard to innovate in IPOs, probably partially because these first day gains don't tend to bother issuers. Bankers would rather do things the traditional way (and make institutional buyers happy with big first day gains) and issuers tend to be relatively conservative about risking their only IPO on a less-proven method
Look at it this way: if you're the CEO, you're not going to get fired because of a 50% first-day gain. But if you botch things because you wanted to do a non-traditional IPO, you may be.
Look at it this way: if you're the CEO, you're not going to get fired because of a 50% first-day gain. But if you botch things because you wanted to do a non-traditional IPO, you may be.
I've worked both on the buy and sell side of the new issue trade. On the buy side, as a proprietary trader, who had the option to buy the new issue (or not). On the sell side, pricing and structuring deals with the equity capital markets team, and placing them into the market. (This means selling them to institutional clients.)
It's not surprising to me that this stock exhibited really high volatility on day one. It's not easy to value this particular block of equity. It could easily have traded down 50% if the pricing was overly aggressive.
Here's why:
- Not profitable.
- No easy comparables to help you know what metrics the market is going to care about, or what multiple it will apply.
- Sub-majority block of equity being sold means public shareholders won't have control as a group.
- Large overhang in the form of the significant amount of shares that aren't being sold in the IPO, but will eventually need to get sold.
Typically an IPO would be shopped around the street, meaning that multiple banks would have the opportunity to handle the sale.
If it's a fully underwritten deal, one parameter that gets negotiated is the underwriting price: bank X will guarantee that you sell the stock for no less than $15; bank Y will guarantee that you sell it for no less than $18. (Note: they take a % off the top. Plus commission when they sell it to institutions.)
In a market this starved for IPOs, I'd guess this was an underwritten deal, which means that the other banks probably wanted to place it at an even lower price.
It's not surprising to me that this stock exhibited really high volatility on day one. It's not easy to value this particular block of equity. It could easily have traded down 50% if the pricing was overly aggressive.
Here's why:
- Not profitable.
- No easy comparables to help you know what metrics the market is going to care about, or what multiple it will apply.
- Sub-majority block of equity being sold means public shareholders won't have control as a group.
- Large overhang in the form of the significant amount of shares that aren't being sold in the IPO, but will eventually need to get sold.
Typically an IPO would be shopped around the street, meaning that multiple banks would have the opportunity to handle the sale.
If it's a fully underwritten deal, one parameter that gets negotiated is the underwriting price: bank X will guarantee that you sell the stock for no less than $15; bank Y will guarantee that you sell it for no less than $18. (Note: they take a % off the top. Plus commission when they sell it to institutions.)
In a market this starved for IPOs, I'd guess this was an underwritten deal, which means that the other banks probably wanted to place it at an even lower price.
Doesn't anyone have a problem with a company going public that has never turned a profit?
I live in San Francisco and have been using Zipcar for years. They're a wonderful company, with convenient car locations all over the city, excellent customer service, and a very forgiving insurance policy (I was in an accident a couple years ago that totaled their car. I just had to pay $500). So I REALLY want Zipcar to stay in business.
But this just really is beginning to remind me of the crazy shit that was going on 11-15 years ago. Companies back in the day that probably could have built interesting long term businesses imploded when they went IPO and built up massive amounts of capital they didn't need.
Please, someone tell me I'm missing something.
I live in San Francisco and have been using Zipcar for years. They're a wonderful company, with convenient car locations all over the city, excellent customer service, and a very forgiving insurance policy (I was in an accident a couple years ago that totaled their car. I just had to pay $500). So I REALLY want Zipcar to stay in business.
But this just really is beginning to remind me of the crazy shit that was going on 11-15 years ago. Companies back in the day that probably could have built interesting long term businesses imploded when they went IPO and built up massive amounts of capital they didn't need.
Please, someone tell me I'm missing something.
Not at all. I'd rather companies that weren't profitable but had a good chance of growing into profitability with more investment were able to IPO rather than rely on VC.
Another company that went public before ever turning a profit? Amazon.
Another company that went public before ever turning a profit? Amazon.
an IPO is just a way to raise money (oversimplified, but still true), and unprofitable companies raise money from VCs all the time, so is this really all that different?
That's true, but something also that's true is that raising money through an IPO spreads the risk out to the public, whereas with VCs, the risk is contained.
That's why one of Peter Thiel's original arguments on why there was no bubble centred on the fact that there were no IPOs. No IPOs meant no general public irrationally driving up the price of a stock; rather, the rise in a stock's price in most of the big-name tech startups (or high-growth companies) today are from investment activity from savvy investors who are experts in the space.
That's why one of Peter Thiel's original arguments on why there was no bubble centred on the fact that there were no IPOs. No IPOs meant no general public irrationally driving up the price of a stock; rather, the rise in a stock's price in most of the big-name tech startups (or high-growth companies) today are from investment activity from savvy investors who are experts in the space.
exactly! their business model is rock-solid, nobody else can tap the market AND they have plenty of patents... NOT!
Funny it doesn't seem that long ago (okay, ten years ago) Henry Blodget was on the other side of the fence.
No, the CEO made a bad deal with banks and is now using PR to shift the blame from himself to his bankers.
If everyone intrinsically knew that ZipCar was worth $30 then why did he sign a contract with the banks that allowed them to sell it for $18? Banks can't just a your company public on their own, they need the consent of the CEO and/or the board, when you sign this contract it outlines how the bank will take your company public.
If he didn't like that option he could always buy a shell listed on the exchange and do a reverse-merger. There are plenty of ways to take a company public and very few of them involve trusting GS to sell your company at whatever price they determine. If as CEO he allowed his company to be swindled out of $50 million he should resign in disgrace. He's so ingrained in the sausage making process he himself has been banned from trading.
As an aside after how badly GS and JPM fucked over the entire world it should give one pause as to whether you'd sign a contract with any entity who had demonstrated such moral hazard. They're called banksters for a reason.
Also, if you take IPO stock there is a gentleman's agreement that you won't sell it for 90 days, so it remains to be seen how well these investors actually did.
If everyone intrinsically knew that ZipCar was worth $30 then why did he sign a contract with the banks that allowed them to sell it for $18? Banks can't just a your company public on their own, they need the consent of the CEO and/or the board, when you sign this contract it outlines how the bank will take your company public.
If he didn't like that option he could always buy a shell listed on the exchange and do a reverse-merger. There are plenty of ways to take a company public and very few of them involve trusting GS to sell your company at whatever price they determine. If as CEO he allowed his company to be swindled out of $50 million he should resign in disgrace. He's so ingrained in the sausage making process he himself has been banned from trading.
As an aside after how badly GS and JPM fucked over the entire world it should give one pause as to whether you'd sign a contract with any entity who had demonstrated such moral hazard. They're called banksters for a reason.
Also, if you take IPO stock there is a gentleman's agreement that you won't sell it for 90 days, so it remains to be seen how well these investors actually did.
How do you differentiate between undervaluation and over-exuberant, illogical investors? Neither is a good situation.
I doubt they're crying in their milk tonight at Zipcar headquarters.