Given that Snap paid out billions in IPO bonuses to executives and other employees, it's turned out to be a pretty big wealth transfer from retail investors to Snap employees.
This seems like a pretty good reason to auction the shares in order to maximize the amount of money the company takes in. That they very rarely do has always seemed kind of dirty to me.
Can you provide some evidence that the investment banks are colluding on IPO pricing?
Well, the "proof" being "we all know banks are greedy and evil, so they must be doing this"
I have no opinion about actual 'collusion' but the mechanism looks pretty bad seen from afar.
Do you have evidence the banks are colluding on price?
Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers.
Nope, which is why I wrote that I have no opinion on that. Edit: I think that very direct collusion would probably not be a stable arrangement, long term. But perhaps 'not competing too hard' between a low number of competitors with big barriers to entry is realistic.
> Edit: to clarify, no the banks do not really set the IPO price. The banks offer different underwriting prices. The company ultimately chooses the price among the many banks' offers.
That's still a way less transparent and market-oriented option than auctioning the shares. It's a hell of a lot easier for a few banks to be 'gentlemanly' in their competition than it is for lots of people trying to get some shares at an IPO via an auction.
I mean, we're discussing an IPO that was "oversubscribed" at the set price, meaning money was being left on the table, right?
Er, no, it's literally set by an auction (the auction occurring between the different banks who can underwrite the IPO).
A bank that is consistently able to predict the IPO opening-bell price better than the others, or is willing to accept a slightly smaller cut than the others, will win the auction, and will outperform the others on average.
What do you mean? Do you have a reference?
This [1] is a well-written prose from Matt Levine on the role of underwriters in working with Snap prior to their IPO.
[0] https://www.bloomberg.com/view/articles/2016-01-15/uber-is-r...
[1] https://www.bloomberg.com/view/articles/2017-03-27/banks-tha...
Edit: thanks for the clarification
Wikipedia states "Anti-intellectualism is a hostility to and mistrust of intellect, intellectuals, and intellectualism commonly expressed as deprecation of education and philosophy or dismissal of art, literature, and science as impractical and even contemptible human pursuits.[1]"
None of that is happening in the grandparent (as far as I can tell.)
You can certainly accuse them of biased unverified information and demand proof, its just not anti-intellectualism.
On the other hand, the entity that they are taking money from is literally the company that's IPOing (when the price shoots up, it's called leaving money on the table, because it's money that the company isn't raising in their IPO, and is instead going to the banks).
There's a reasonable degree of competition between banks to underwrite an IPO, and companies have the ability to choose which bank to work with, so any conspiracy here would require actual widespread collusion between underwriters (which would be illegal the same way horizontal integration generally is in any industry). While not impossible, that's the sort of claim which warrants tangible evidence, rather than indirect evidence just from the existence of shareholder prices increasing on the opening bell.
Assuming a roughly competitive market with n players that do not engage in direct collusion, if IPO prices are being set too low from the perspective of the companies IPOing, there's room for an additional player (n+1) to set their prices slightly higher. Assuming their ability to predict the risk on the opening bell prices is the same as the other n players' ability to predict risk, that bank will produce IPOs that are consistently favorable for the companies IPOing, and companies will choose that bank as their underwriter. Ceteris paribus, their profits would grow, not shrink.
There are factors that impede this from happening perfectly in practice - such as barriers to entry for the underwriters - which is (part of) what explains why this disparity won't trend to exactly zero. But it's wrong to say that banks would get punished by either companies or their investors for responding to this disparity by raising prices - the exact opposite would happen. And in itself, that still doesn't point to widespread collusion between banks, or even any sort of implicit conspiracy.
I agree that there would be a solid market demand for this company. The same way there would be much demand for a telecom/isp that provides more speed at reduced price. Consumer demand isn't always the only thing needed for a business to succeed, despite what pg says.
This is a thought experiment, designed to illustrate that auctions (which IPOs are - an auction between underwriting banks) converge towards the maximum price that individual participants would be willing to pay. You can easily extend this logic to any individual participant.
> in return of reduced profits
You keep saying "reduced profits". If you seriously believe that banks are artificially keeping bids low, then there would be no reduced profits - any individual bank willing to outbid the rest consistently would completely sweep the entire market, capturing all profits across the market of banks which underwrite IPOs.
Of course, this won't happen, because banks aren't artificially keeping bids low, which is the whole point. You can't just point at the fact that post-opening bell prices are greater than IPO prices to show that banks are colluding with each other, because that doesn't prove anything. The current prices are completely consistent with a competitive market.
While true, the company can manage that risk by limiting the amount of shares to float, and then allocate more shares for sale in a secondary offering (Tesla just did one in 2016).
The game theory kicks in, though - when the float is too small, who's going to be the first sucker to bite on the buyers' side, knowing that a massive amount of shares is prepared for a secondary float shortly afterwards? I sure as heck wouldn't touch it, why not have someone else do price discovery.
There is also a lot of other considerations to consider when fielding a proposal from an investment bank, from research analyst assignment, purchasing from the AM arm, access to lines of credit and other financial arrangements.
You could argue that companies should be allowed to take themselves public and list directly. However in a world where people are clamoring for ever more regulation that is unlikely to be a common way for a major company to go public. Personally I would like to see less regulation in the equity market, but I am unlikely to receive that ;-)
Further Reading:
http://www.mergersandinquisitions.com/initial-public-offerin...
http://libertystreeteconomics.newyorkfed.org/2012/10/in-a-re...
That's how IPO pricing works too. The banks compete against each other and the company chooses their underwriter.
This is how markets work. I fail to see how an IPO is "rather than using a market-based mechanism for price discovery, they pick a price to sell at".
I think davidw is making some strong claims without understanding how the IPO process really works
This is not an example of a principal-agent problem. There are two competitive markets: the competitive auction between underwriting banks, and the competitive market between public traders. The price between these two differs because the underwriting banks assume a great deal of risk in the process - risk which otherwise would be borne by the company.
> And to my knowledge they don't continue to be traded once they're bought, either, so it's sort of apples to oranges.
Breakfast cereals are definitely sold wholesale by third-party suppliers (as are apples and oranges as well).
For one, you asked for proof that banks are colluding on pricing when nobody claimed that.
It's well known that the IPO company and issuer price the stock to try to get a "pop" on the date of the IPO, to toss some money the bank's way. It doesn't always work, but they do not try to price the company optimally. Similarly, the IPO company doesn't want to price it TOO low because they don't want to leave too much money on the table.
Ironically, your comment is also lazy anti-intellectualism.
(and even more ironically, so is mine!)
Investor doesn't quite have the same urgency. Sure, they could buy the stock the day prior to the IPO, but they could also get it the day of IPO, or the next day, or the next week, or a year after. That's the beauty of the public markets - there's always more shares as long as one is willing to put up cash.
Now, how will the company compensate the investor for the urgency?
As far as I can tell, all tech IPOs following that went back the traditional way.
How can I learn more about this?
https://www.quora.com/How-was-Googles-IPO-unique/answer/Yair...
In a Dutch auction if you keep your bid low there's always a chance you will get your shares and at a good price. As actually happened in the Google case. Yes you're risking you might not get any shares, but bidding higher risks unnecessarily pushing the price higher for yourself and everyone else.
> Often called a "Dutch" auction, this type of sale allows any investor—institution or individual—to put in a bid over the Web for a certain number of shares at a certain price without knowing what others are offering to pay. After the bidding, the highest price at which every available share can be sold becomes the price for all the shares—the IPO price. Google, along with early backers, was selling almost 20 million shares, and bids could be submitted for as few as five.
This doesn't actually remove the incentive to underbid. You might be thinking of a Vickrey auction? That's an auction of one item, in which the high bidder pays the second-highest bid. (This is what I always think of when I hear "dutch auction".) There's an obvious generalization to auctioning multiple items; but the Google auction is not that generalization, and also that generalization apparently doesn't work.
See https://en.wikipedia.org/wiki/Dutch_auction and https://en.wikipedia.org/wiki/Vickrey_auction . Frustratingly, the Dutch auction page describes a "second-price auction" which is different from that described on the "second-price auction" page that it links to, which redirects to Vickrey auction. It's a whole mess.
In an English auction the auctioneer starts at a lowball (possibly zero) price and gets increasingly higher bids until he's satisfied that the price can't go any higher. In a Dutch auction the auctioneer starts from a highball price and lowers it himself gradually until he gets a buyer.
A second, orthogonal issue is if an auction is if it's first price (as most auctions: best bidder pays best bid), second price (best bidder pays second best bid) or something more complicated. Economists love the idea of second price ("Vickrey") auctions, but I personally haven't seen it used.
I recommend Bob Milgrom's article "A primer on auctions". It's in the Journal of Economic Perspectives sometime in 88 or 89 I think.
Actually, there's very much a lot to recommend in the Journal of Economic Perspectives whenever you want to learn about something in economics. This journal focuses on publishing accessible surveys of research areas that are just beginning to solidify (and already have a "shape" to them), rather than publish new ideas. It has excellent curatorship and articles tend to be written by top experts in each field.
There's nothing dirty about it. Public investors prefer to have a single price, because that's, well, how public markets generally operate after an IPO. They don't want to have to participate in an auction. The purpose of underwriting banks is to provide a single price to public investors while also providing a competitive market for the companies.
The auction occurs between the underwriting banks, who compete for the company's business. The company chooses the bank that they want to use for their IPO (price being one of several factors, as is true for any marketplace). There's some risk involved, which is why underwriting banks effectively take a cut - in that sense, they're acting like an insurer, which takes a premium in exchange for absorbing risk for both parties.
In what sense is there a single price in public markets? There is a constantly-shifting order book full of many different prices, and the price of the last trade changes by the second.
If IPOs were conducted as a multi-item second-price auction, then everyone could indeed pay the same, fair price, more in line with what you described than the public post-IPO market.
Those are two completely different things. Underwriters are there to ensure that the company is able to predict the amount of money that an IPO will raise. There are all sorts of legitimate reasons that a company needs to be able to predict the amount of money an IPO will bring in, starting with the fact that it's literally the entire point of an IPO.
Even in the Dutch-auction style that's been proposed in other comments, you don't solve the problem that some investors will be able to invest at the IPO price and others won't. The supply is finite; as long as demand ends up exceeding supply, you're still running the risk of people not being able to purchase shares, except now you've also done away with the invariant that a company can predict the amount of money it's going to raise.
(Note that even Google, which famously used a Dutch auction for its IPO, had an underwriter, and the underwriter had to change the share price at the last-minute because some larger institutional investors indicated that they were going to back out of the IPO and wait to trade later in the day. If that had ended up happening, it would have completely wiped out the money that Google was trying to raise by having the IPO in the first place).
Underwriters have access to a bunch of people who marked themselves as aggressive investors (SEC rule to avoid snake oil companies pitching their imminent incredible IPO to a random grandma), who can then commit to smaller chunks.
If you build a platform that is capable of raising eight-digit amounts, you can advertise yourself to pre-IPO companies as a possible underwriter.
A few questions to consider.
1) How are you going to acquire those investors? Underwriters typically enjoy a large wealth management group that can provide them with a list of eligible investors.
2) How will you handle the financial transactions themselves? Underwriters typically enjoy having a banking license or two, which allows them to hold customer funds, as well as brokerage license or two, which allows them to act as a custodian for those shares once they're bought.
3) How will you, the middleman platform, get paid?
Tho Charles Schwab bank accounts are useful because they refund your ATM fees.
And they offer you commission-free trades too if you offer to transfer in enough funds.
Great, great, place to keep your finances.
Has their security improved since they made HN a few years ago?
Refunds on all ATM fees make it worth it for that alone.
This article is taking about July 31 as the earliest lockup expiration, but not clear as to which class of stock this is for: "The perceived catalyst for an impending drop is a total of 1.2 billion fresh shares that will become available for sale after post-IPO lockups expire July 31 and Aug. 31" Source: http://www.marketwatch.com/story/snap-short-sellers-bet-on-a...
“And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful” - Warren Buffett
http://fortune.com/2017/05/06/warren-buffett-berkshire-hatha...
until today, that is
If the company prices the IPO in a way where the stock drops below its IPO price (FB, SNAP), people complain that retain investors who bought on opening day are now underwater.
Heads I win Tails you lose?