Just to get a sense of IPO pricing incentives:
Who benefits when an IPO like this is underpriced? And who benefits when an IPO is overpriced?
Is there anyone incentivized to price an IPO accurately?
Who benefits when an IPO like this is underpriced? And who benefits when an IPO is overpriced?
Is there anyone incentivized to price an IPO accurately?
-Having a high price allows the company to raise money in the IPO with less dilution. A high price is also good for anyone selling stock in the offering or selling stock after the lockup (assuming the price remains high until the lockup)
-Having a low price causes more dilution for the same amount of capital raised, so this is worse off for the company stockholders. It is good for people who want to buy stock in the IPO though.
-Accurately priced IPO is harder to define. Some say an accurately price IPO is one that pops up 50% on the 1st day. Others say that IPOs with large pops are not great because they show the company left money on the table.
-Ultimately, the most important thing is that the company and stock perform well over the next several years. Bankers make their fees on the IPO, but pretty much everyone else wants the price to be stable or rise through the lock up period and then wants it to keep doing well!
This is distinct from the underwriters’ incentives to estimate the valuation when they pitch the company on why they should do the IPO. If you give a number that’s too low you get nothing, so your incentive is to name as high a number as possible without being obviously ridiculous (to the executives, not to anyone else).
Or is that thinking too simplistic?
Softbank has taken out loans secured with Uber stock during the lock up period.
If the value of Uber tanks, Softbank retains the money, and the bank takes the stock. Softbank has effectively sold their stock ahead of time, removing any downside risk.
On the flip side, if Uber stock goes up, Softbank can sell their Uber stock (post-lockup) at a profit, pay back the loan, and enjoy all the upside reward.
I'm reasonably sure I've read reports that they've taken out secured loans on their Wework stock too. Effectively sold the downside risk before IPO.
Also, depending on what category of investor you are, you have liquidation preferences. You may be the one providing the stock that's being sold at IPO.
It’ll be interesting if they indeed have taken out these loans against We stock. And especially how much.
Obviously the bankers wanting to conduct the IPO, want to give the IPOee a high valuation figure, but the scale is normally lower than this. Existing stock holders will obviously want a high valuation, and want to be given a high valuation by the bankers. In other words, rowing back on the price isnt that unusual, the scale here is vastly different though.