The price that Lyft sold newly issued shares at yesterday was $72. They raised $2B at that price. Some of those investors put up their new shares into public markets this morning and got a handsome profit.
The lockup period is for existing shares that affect employees, founders, and prior investors. The new shares that are issued and then sold at the IPO offering price are able to be traded immediately and this is where the volume comes from.
In order to be a buyer of an IPO you need to have a tremendous amount of net worth, think 10’s of billions of dollars, you need to have a relationship with a bank, and you need to subscribe to all of the IPOs on the calendars, not just cherry pick the ones that you want.
The entire IPO process is really a very limited market place to a very select few buyers and these are typically very large endowments, mutual funds, and so forth.
In order to assure the company that they have buyers, they promise a return to those buyers in the price popping immediately after the IPO, otherwise the IPO pricing loses it’s allure.
In a Dutch auction, typically new shares aren’t created, and instead existing investors sell shares. This means that the company doesn’t get any of that cash on it’s balance sheets. This is done when the company is profitable, or has enough cash reserves to become profitable in the near future and the investors then want to get all of that pop by offering those shares directly.
Now for investors in a regular IPO, it’s also ok for investors, because while the company gets a bit less cash on its balance sheet, the investors shares are valued immediately on the public market and have the benefit of the pop. With the idea being that they will retain this higher value post the 6 month lock up.
However, you will already have two sets of quarterly results typically in that window in which case Wall Street will continue to evaluate the stock. If you can hit your projections you will be in good shape, however, if there are any misses, as was the case with Snap, all of that exuberance was tied to impossible numbers so the reset can be quite harsh.
And in public markets, that reset is instantaneous, because as soon as the news hits the market cap is immediately affected as shares are then traded on this news.
> In a Dutch auction, typically new shares aren’t created, and instead existing investors sell shares. This means that the company doesn’t get any of that cash on it’s balance sheets. This is done when the company is profitable, or has enough cash reserves to become profitable in the near future and the investors then want to get all of that pop by offering those shares directly.
This is wrong. Typically its still the company that sells shares. Infact Dutch auctions vs typical IPO's are orthogonal to who sells shares.
In both case the vast majority of the time its the company selling shares from its float.
I think GP was thinking of direct listing, like Spotify's, in which the company does not issue new shares and instead the stock is listed on a market and insiders put up their own sell orders to provide initial volume to the market. In this case, there is no lockup and founders, employees, and other insiders can get immediate liquidity.
I think you are overselling how exclusive IPOs are... There are plenty of investors 'only' worth millions, not 10s of billions (??? that's like 100 individuals world wide...), that get offered IPOs by large brokerages as a benefit.
The stock is in free fall right now. It popped because it was so much hyped accross regular investors. Right now I predict that one week from now it will go under the 72$ opening price
Hm isn't it the listing firm who pays the underwriters?
Why would they want to "engineer" a pop? The bigger the pop between the listing price and what the price settles at, the less cash the listing firm raised relative to what they could have raised.
Even existing shareholders don't really benefit from a pop because they would be able to sell at the "true" market price that the listing firm _should have raised_ at, as well as the true marketing price that the price eventually reaches. The only people who benefit are those who got in between the listing price and the closing pop price - at the expense of the listing firm.
IIRC Google did that, and didn't experience a first-day pop.
The company sells its shares to the underwriter at the IPO price; so the company gets the money up front from the underwriter. It is in the company's interest to price it as high as it can; and in the underwriter's interest to price it as low as it can. If the underwriter wins, you see a pop; if the company wins, you see flat or a decline.
This is why a Dutch Auction is the best option for IPOs, but underwriters hate that (insert "the underwriters hate him!" meme).
But it's a balance, isn't it? Since the company is selling most of the shares (if not all), then the higher the opening price the more money the company to invest in growth and R&D.
You take that money and build a new product, improve an old one, shutter a competitor via buyout, or ramp up production in another factory (so you have more capacity and can't get gouged as badly by your one manufacturer).
If instead you screw them over, doesn't that kill P/E and hence greatly lower the predicted future gains?
I got down-voted for asking a question? Like maybe I want to wait to buy the stock and might want to wait until the insiders sell. Since most IPOs have a drop after the insiders sell.
- unlike hte SNAP IPO, this one has some buy ratings
- lock up date of Sept 2nd
- company valued at $25Billion, though note the financial engineering of a relatively small float that helps push up the stock price.
- upsized offer from 30.8M shares to 32.5M( around 11% of float, this is a relatively small float)
Groupon tried this kind of financial engineering to prop up a bad business, it didn't go well then
- valued at 10x 2018 revenue, wow, given the losses, wow.
- CEO won't talk about how they'll become profitable, now that they are out of the IPO window that's a bit of a worrying trend, though clearly Wall St doesn't seem to currently care
- no international expansion plans outside of Canada
> "We may choose to do that some day but we don't have current plans."
-now trading below its opening trade, not to be confused with its opening price.
Uber had better IPO this year.
By Year end Lyft will have reported 3 times so investors will start to look for losses to shrink and see a path to profitability. Lyft Share lock ups will also be off so Lyft will get some selling pressure.
If Lyft can't support the high valuation it currently has 9-12 months out then Uber had better have a better story than "we're Lyft but bigger".
I'd expect to see an S-1 from uber in April and an IPO by the end of the summer to avoid this scenario.
Longer answer is that by only allowing a small float to trade, you have artificially limited the number of shares available(supply). All other things being equal, a small float leads to a higher share price as people will have to pay more to get shares if they want them.
Now, this will come to a head as eventually large holders and employees will be allowed to trade their shares, thus increasing the supply of shares.
Also given Lyft has no assets to use as collateral against a debt issuance and I'll work with the assumption that they'll need to raise money again given the losses Lyft will probably issue new shares again in the open market(secondary offering) within 3 years(this is my opinion) further increasing hte supply of shares.
This will obviously increase the supply of shares available and, as micro economics teaches us, lower the price per share.
Now you'll start to think something about efficient markets and shouldn't this be priced in. And the answer is yes, kindof.
But the truth is that looking at historical chats you can often identify the times when share came off restriction by the dip in the chart leading up to those days.
Think of it like the bitcoin price, most people aren't factoring in coins that we assume are lost or ones that belong to satoshi from his/her initial mining. If all of those btc hit the market, even in a slow and orderly way, the price of BTC, all other things being equal, would go down.
For growth companies equity analysts look at forward ratios - projected several years out. 10x in 2018 will probably be 5-6x in 2019 and 3-4x in 2020 and maybe 2-3x in 2021. Still very high but at least approaching sane levels.
The float is typical and not small as it is basically all of the shares that are issued for the actual fund raise portion of the IPO. Aside from that the only other shares that can be traded are those that aren’t under lockup, and given that the majority of shares are owned by investors, founders, and employees there are always restrictions there for a minimum of 6 months.
> The percentage of companies sold in U.S.-listed IPOs has overall come down over the past 20 years, though not dramatically, according to Dealogic figures. From 1995 to 1997, the average company sold 36% of its shares to the public. In the last three years, the average was 27%.
> This year, 27.7% of shares have been sold in the average IPO. That is up slightly from last year, when 27.3% of shares were floated in IPOs.
Since Powell lost his nerve, and completely rolled over for the investor class, I think you'll see more IPO's than you can shake a stick at in the very near future. The banker's have realized the IPO Market is wide open (for now!), and better make hay while the sun shines.
A small float makes a lot of sense now. With much of the market now investing in a quasi passive fashion, or systematically, these strategies will not buy an IPO. In fact, many of these strategies require several reporting cycles.
I remember vividly that when Facebook stock price went down to less than half of its IPO value, the whole HN community was convinced that Facebook was a just fad. Well, more like vindicated. Everyone was glad that reality was reconciled with their world view, including myself. How wrong we have been.
Since then I have learnd to reserve judgment for any company, regardless of how their IPO goes.
Can some kind soul please explain to me why popping on the first day is considered to be a good thing? Isn't the company leaving the money on the table for investment banks and their rich clients if they do not sell their shares at an optimal price?
The window immediately after IPO is the first reliable source of information about how much the general public actually wants to buy Lyft stock. So if shares jump 21% upon gathering that information, it doesn’t necessarily mean the IPO price should have been 21% higher.
That's exactly what it means. Nobody wants to buy Lyft stock. People only want to buy Lyft stocks at particular prices. Turns out the equilibrium price was 21% higher than the offering price.
I agree it's leaving money on the table for the company, but I believe that investment banks' rich clients get to buy at the IPO price, so the "pop" is an immediate bonus for those clients. Bad for the company (which would hope for 0% pop) but good for the banks and their clients. I imagine that for companies not using banks, there's less incentive for this?
You are correct. This is why Google went with the dutch auction IPO. However the underwriters (banks) that manage the IPO desire a pop to make the venture worth while and thus have actively cultivated the idea that popping is a signal of value.
Privileges of running the IPO. The bank needs to leave upside room for its "best" customers. The company wants to be fully booked and raise as much as possible. It's a balancing act for both sides, with non perfect information.
the other thing to note is that a 10-20% pop is entirely due to that kind of institutional backscratching, rather than an indicator of underpricing.
if the principal underwriter can't put a syndicate together to pop the IPO that much, they're not worth their fees. it's a standard part of the game now.
I think part of it is that the pop generates goodwill among the big players, making it easier for the company to tap the markets in the future. But it's fair to argue that a pop means that some money was left on the table.
They sold 32.5 million shares at $72 apiece, raising $2.3 billion. If you really believe that the 'true' price was the first transaction on the open market, then they left about $400m on the table, not four billion.
This is a tough business to be in and it's probably not recession proof. Good thing for them to raise all that cash so they get a longer runway if the economy goes south.
Seeing that IPOs are designed to pop, I don’t find it that surprising.
The naive way to look at an IPO that pops the first day of trading is that the investment bankers left a lot of money on the table and the company got screwed. But if an IPO was set at a fair price (the price after the first day of trading), the company might have a hard time generating the pre-IPO demand in the first place for their roadshow. After all, the only reason to subscribe to an IPO and get pre-allocated shares is to make some juicy risk-free returns.
So the company makes the explicit choice to trade off short-term profits for short-term (but hopefully longer) artificially induced demand.
The bankers win by allocating shares to investors they like hoping that the favor will be returned in the form of business in the future (on top of the fat fee they make). The subscribed investors win by the risk-free return. The company wins be inducing demand.
This has been the process and the incentives that have governed IPOs for a long long time. It’s interesting that this process might be supplanted with direct listings or auctions ala Spotify or Google.
The underwriters should have priced the deal higher so the company would have more money to invest. Pop is a handout to favored clients of the underwriters (or a subsidy to encourage them to subscribe).
It's like the VCs having the company pay its legal bill when doing a deal: less of the LP's money for the company to invest, while they get to pocket the money the LPs did give the firm for this purpose (management fee -- the 2% of "2 and 20").
And the press describes the pop as a good thing. It's underwriter malpractice.
85 comments
[ 2.7 ms ] story [ 147 ms ] threadAt least that's a benefit of printed papers.
https://en.wikipedia.org/wiki/Market_correction
In order to be a buyer of an IPO you need to have a tremendous amount of net worth, think 10’s of billions of dollars, you need to have a relationship with a bank, and you need to subscribe to all of the IPOs on the calendars, not just cherry pick the ones that you want.
The entire IPO process is really a very limited market place to a very select few buyers and these are typically very large endowments, mutual funds, and so forth.
In order to assure the company that they have buyers, they promise a return to those buyers in the price popping immediately after the IPO, otherwise the IPO pricing loses it’s allure.
In a Dutch auction, typically new shares aren’t created, and instead existing investors sell shares. This means that the company doesn’t get any of that cash on it’s balance sheets. This is done when the company is profitable, or has enough cash reserves to become profitable in the near future and the investors then want to get all of that pop by offering those shares directly.
Now for investors in a regular IPO, it’s also ok for investors, because while the company gets a bit less cash on its balance sheet, the investors shares are valued immediately on the public market and have the benefit of the pop. With the idea being that they will retain this higher value post the 6 month lock up.
However, you will already have two sets of quarterly results typically in that window in which case Wall Street will continue to evaluate the stock. If you can hit your projections you will be in good shape, however, if there are any misses, as was the case with Snap, all of that exuberance was tied to impossible numbers so the reset can be quite harsh.
And in public markets, that reset is instantaneous, because as soon as the news hits the market cap is immediately affected as shares are then traded on this news.
This is wrong. Typically its still the company that sells shares. Infact Dutch auctions vs typical IPO's are orthogonal to who sells shares.
In both case the vast majority of the time its the company selling shares from its float.
10x Revenue Valuation. Check.
Shares locked up for everyone except rich guys. Check.
Houston we are clear for LYFT OFF!
Why would they want to "engineer" a pop? The bigger the pop between the listing price and what the price settles at, the less cash the listing firm raised relative to what they could have raised.
Even existing shareholders don't really benefit from a pop because they would be able to sell at the "true" market price that the listing firm _should have raised_ at, as well as the true marketing price that the price eventually reaches. The only people who benefit are those who got in between the listing price and the closing pop price - at the expense of the listing firm.
IIRC Google did that, and didn't experience a first-day pop.
The company sells its shares to the underwriter at the IPO price; so the company gets the money up front from the underwriter. It is in the company's interest to price it as high as it can; and in the underwriter's interest to price it as low as it can. If the underwriter wins, you see a pop; if the company wins, you see flat or a decline.
This is why a Dutch Auction is the best option for IPOs, but underwriters hate that (insert "the underwriters hate him!" meme).
https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac...
yeah but if you sell the first day you'll never get an allocation again, word gets around.
so leverage up and do it once with a lot of money and hope the IPO bid doesn't break apart.
You take that money and build a new product, improve an old one, shutter a competitor via buyout, or ramp up production in another factory (so you have more capacity and can't get gouged as badly by your one manufacturer).
If instead you screw them over, doesn't that kill P/E and hence greatly lower the predicted future gains?
- Opens at $87.24, IPO at $72.00
- raised about $2.34 Billion in cash
- unlike hte SNAP IPO, this one has some buy ratings
- lock up date of Sept 2nd
- company valued at $25Billion, though note the financial engineering of a relatively small float that helps push up the stock price.
- upsized offer from 30.8M shares to 32.5M( around 11% of float, this is a relatively small float)
Groupon tried this kind of financial engineering to prop up a bad business, it didn't go well then
- valued at 10x 2018 revenue, wow, given the losses, wow.
- CEO won't talk about how they'll become profitable, now that they are out of the IPO window that's a bit of a worrying trend, though clearly Wall St doesn't seem to currently care
- no international expansion plans outside of Canada > "We may choose to do that some day but we don't have current plans."
-now trading below its opening trade, not to be confused with its opening price.
Uber had better IPO this year.
By Year end Lyft will have reported 3 times so investors will start to look for losses to shrink and see a path to profitability. Lyft Share lock ups will also be off so Lyft will get some selling pressure.
If Lyft can't support the high valuation it currently has 9-12 months out then Uber had better have a better story than "we're Lyft but bigger".
I'd expect to see an S-1 from uber in April and an IPO by the end of the summer to avoid this scenario.
Longer answer is that by only allowing a small float to trade, you have artificially limited the number of shares available(supply). All other things being equal, a small float leads to a higher share price as people will have to pay more to get shares if they want them.
Now, this will come to a head as eventually large holders and employees will be allowed to trade their shares, thus increasing the supply of shares.
Also given Lyft has no assets to use as collateral against a debt issuance and I'll work with the assumption that they'll need to raise money again given the losses Lyft will probably issue new shares again in the open market(secondary offering) within 3 years(this is my opinion) further increasing hte supply of shares.
This will obviously increase the supply of shares available and, as micro economics teaches us, lower the price per share.
Now you'll start to think something about efficient markets and shouldn't this be priced in. And the answer is yes, kindof.
But the truth is that looking at historical chats you can often identify the times when share came off restriction by the dip in the chart leading up to those days.
Think of it like the bitcoin price, most people aren't factoring in coins that we assume are lost or ones that belong to satoshi from his/her initial mining. If all of those btc hit the market, even in a slow and orderly way, the price of BTC, all other things being equal, would go down.
Well it would have to be some multiple of revenue as a multiple of profits wouldn’t make any sense (as its negative).
Still though that’s nuts!
Lets agree to disagree. Snap for instance went public by listing 200M shares out of around 1B so 20%.
Under 10% of float trading is, historically speaking, small.
Lyft went public with 32M shares out of 273M or 8%. 8% is a relatively small float, Groupon tried something similar.
The rest of your comment I agree with.
Here is a piece you can use to learn about IPO's and floats
https://outline.com/BTx8KT
> The percentage of companies sold in U.S.-listed IPOs has overall come down over the past 20 years, though not dramatically, according to Dealogic figures. From 1995 to 1997, the average company sold 36% of its shares to the public. In the last three years, the average was 27%.
> This year, 27.7% of shares have been sold in the average IPO. That is up slightly from last year, when 27.3% of shares were floated in IPOs.
Since Powell lost his nerve, and completely rolled over for the investor class, I think you'll see more IPO's than you can shake a stick at in the very near future. The banker's have realized the IPO Market is wide open (for now!), and better make hay while the sun shines.
https://en.wikipedia.org/wiki/Jerome_Powell
It now trades at less than half of that.
And they were crowing when FB hit 16. But they were wrong all throughout.
https://en.wikipedia.org/wiki/Market_correction
Since then I have learnd to reserve judgment for any company, regardless of how their IPO goes.
if the principal underwriter can't put a syndicate together to pop the IPO that much, they're not worth their fees. it's a standard part of the game now.
Every bit of information about stocks contains that disclaimer. Probably because everyone ignores that disclaimer...
If some group who does underwater IPOs tries to get you to sign up to back their next IPO you won't return their calls.
What I’m trying to say is your hypothesis is not correct
The naive way to look at an IPO that pops the first day of trading is that the investment bankers left a lot of money on the table and the company got screwed. But if an IPO was set at a fair price (the price after the first day of trading), the company might have a hard time generating the pre-IPO demand in the first place for their roadshow. After all, the only reason to subscribe to an IPO and get pre-allocated shares is to make some juicy risk-free returns.
So the company makes the explicit choice to trade off short-term profits for short-term (but hopefully longer) artificially induced demand.
The bankers win by allocating shares to investors they like hoping that the favor will be returned in the form of business in the future (on top of the fat fee they make). The subscribed investors win by the risk-free return. The company wins be inducing demand.
This has been the process and the incentives that have governed IPOs for a long long time. It’s interesting that this process might be supplanted with direct listings or auctions ala Spotify or Google.
It's like the VCs having the company pay its legal bill when doing a deal: less of the LP's money for the company to invest, while they get to pocket the money the LPs did give the firm for this purpose (management fee -- the 2% of "2 and 20").
And the press describes the pop as a good thing. It's underwriter malpractice.