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IPO Price is a Balancing Act
more in Deals India »
By SAMITA SAWARDEKAR
LinkedIn's stunning debut on listing led to many charging bankers on the deal with mispricing initial share sales at the cost of the issuer. While lately the chatter has shifted to the gall of Groupon, the daily deals site, to value itself at nearly $20 billion.
A New York Times piece summed up the LinkedIn criticism succinctly. The contention was that the bankers underpriced LinkedIn at $45 (since the stock more than doubled on the first day of listing) and this mispricing was intentionally done to favor the banks' investor clients.
While bankers are an easy whipping target, the LinkedIn instance only goes to show, once again, that valuation is an inexact science. And, pricing of an initial public offering depends on a variety of factors which change with market dynamics.
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Justin Sullivan/Getty Images The LinkedIn headquarters in Mountain View, California.
An initial public offer pricing, by its very nature, is a delicate balancing act between issuer and investors, both important constituencies of an investment banker. Bankers don't want to overprice deal and loose their investor base but at the same time they don't want to underprice deals and loose their fee-paying issuer clients. The challenge is to balance these conflicting interests and build a long-term sustainable capital markets practice.
To achieve this balance, bankers use a process called book-building. Typically, in the run-up to an offer, the management accompanied by its bankers goes on the road to explain its story to key investors. Post such "road shows", investors are asked to indicate their interest in the deal and their willingness to participate at a certain valuation. This process of book-building is used to "discover" the price, with bankers adjusting the price upwards or downwards depending on the demand for the stock.
However, this process is not perfect and hardly foolproof.
While it reflects demand from a finite number of investors, which the investment banks are in touch with, it's not possible to cover the entire lot of investors who can and do participate in the secondary market.
At the same time, it's not uncommon for investors to change their mind based on market dynamics. In good times, it can lead to a significant increase in demand as the herd mentality kicks in and the frenzy for the stock builds up.
Bankers also look at the composition of the book while making allocations and fixing the price. Ideally, one would want a good mix of long-only funds and hedge funds. Long-only funds tend take a more fundamental view on stocks and are long-term investors as opposed to hedge funds who impart liquidity to the counter but are momentum-driven and can enter and exit the stock in a jiffy.
So, it makes sense to fix a price that reflects the demand from long-only funds, which in a bull market, is typically lower than what hedge funds will be willing to play.
It also makes sense for an issuer to leave something on the table for investors, especially if you expect to tap the market for funds again. Most large initial share sales tend to involve minimal dilution of 5% to 10% and issuers, by letting the price trade up and investors make money, are able to create a loyal investor base that would allow them to tap the market and raise funds in the future.
A case in point is MakeMyTrip, the Indian online travel site. The company raised $70 million in its initial share sale last September. The IPO was priced at $14 and the stock traded up to $43, subsequently settling down to trade around $25. Last month, MakeMyTrip completed its second share sale.
Internet companies, particularly social networking sites, have certainly caught investor fancy. With valuations sky-rocketing, questions are being raised about the building frothiness in the market and its sustainability.
Take LinkedIn itself. The bankers priced, LinkedIn with $243 million in sales and $3.4 million of earnings in 2010, at 17 times sales multiple, which normally is anything but low. Goldman Sachs, an early investor in LinkedIn, chose to sell its entire stake in the initial share sale, something that the global bank would hardly do if it believed the deal was underpriced.
In this column, we had talked last week about why stocks crash post initial share sale. LinkedIn is at the opposite end of the spectrum. Critics would do better to consider the implications of such exuberance, which is a far more worrisome trend.
IPO Price is a Balancing Act
more in Deals India »
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By SAMITA SAWARDEKAR
LinkedIn's stunning debut on listing led to many charging bankers on the deal with mispricing initial share sales at the cost of the issuer. While lately the chatter has shifted to the gall of Groupon, the daily deals site, to value itself at nearly $20 billion.
A New York Times piece summed up the LinkedIn criticism succinctly. The contention was that the bankers underpriced LinkedIn at $45 (since the stock more than doubled on the first day of listing) and this mispricing was intentionally done to favor the banks' investor clients.
While bankers are an easy whipping target, the LinkedIn instance only goes to show, once again, that valuation is an inexact science. And, pricing of an initial public offering depends on a variety of factors which change with market dynamics.
View Full Image
Justin Sullivan/Getty Images The LinkedIn headquarters in Mountain View, California.
An initial public offer pricing, by its very nature, is a delicate balancing act between issuer and investors, both important constituencies of an investment banker. Bankers don't want to overprice deal and loose their investor base but at the same time they don't want to underprice deals and loose their fee-paying issuer clients. The challenge is to balance these conflicting interests and build a long-term sustainable capital markets practice.
To achieve this balance, bankers use a process called book-building. Typically, in the run-up to an offer, the management accompanied by its bankers goes on the road to explain its story to key investors. Post such "road shows", investors are asked to indicate their interest in the deal and their willingness to participate at a certain valuation. This process of book-building is used to "discover" the price, with bankers adjusting the price upwards or downwards depending on the demand for the stock.
However, this process is not perfect and hardly foolproof.
While it reflects demand from a finite number of investors, which the investment banks are in touch with, it's not possible to cover the entire lot of investors who can and do participate in the secondary market.
At the same time, it's not uncommon for investors to change their mind based on market dynamics. In good times, it can lead to a significant increase in demand as the herd mentality kicks in and the frenzy for the stock builds up.
Bankers also look at the composition of the book while making allocations and fixing the price. Ideally, one would want a good mix of long-only funds and hedge funds. Long-only funds tend take a more fundamental view on stocks and are long-term investors as opposed to hedge funds who impart liquidity to the counter but are momentum-driven and can enter and exit the stock in a jiffy.
So, it makes sense to fix a price that reflects the demand from long-only funds, which in a bull market, is typically lower than what hedge funds will be willing to play.
It also makes sense for an issuer to leave something on the table for investors, especially if you expect to tap the market for funds again. Most large initial share sales tend to involve minimal dilution of 5% to 10% and issuers, by letting the price trade up and investors make money, are able to create a loyal investor base that would allow them to tap the market and raise funds in the future.
A case in point is MakeMyTrip, the Indian online travel site. The company raised $70 million in its initial share sale last September. The IPO was priced at $14 and the stock traded up to $43, subsequently settling down to trade around $25. Last month, MakeMyTrip completed its second share sale.
Internet companies, particularly social networking sites, have certainly caught investor fancy. With valuations sky-rocketing, questions are being raised about the building frothiness in the market and its sustainability.
Take LinkedIn itself. The bankers priced, LinkedIn with $243 million in sales and $3.4 million of earnings in 2010, at 17 times sales multiple, which normally is anything but low. Goldman Sachs, an early investor in LinkedIn, chose to sell its entire stake in the initial share sale, something that the global bank would hardly do if it believed the deal was underpriced.
In this column, we had talked last week about why stocks crash post initial share sale. LinkedIn is at the opposite end of the spectrum. Critics would do better to consider the implications of such exuberance, which is a far more worrisome trend.
July 1, 2011 8:14 pm
Zynga unveils plans for $1bn IPO
ByTelis Demos in New York
Zynga, the social networking games developer, has embarked on an initial public offering of $1bn worth of shares, reporting that it generated less-than-expected revenues of almost $600m last year.
While the number of shares sold could change from the initial filing, it demonstrates the scale of the ambition of the world’s largest provider of social networking games, capitalising on Facebook’s popularity to become a hotly sought-after video game developer. It is the latest in a string of recent tech IPOs that some investors worry may be overvalued.
In its filing to the Securities and Exchange Commission, Zynga reported having 232m average MAUS, or monthly active users, or the number of people who engage with the game in a monthly period, across 166 countries in the first quarter of this year.
That puts it ahead of Disney’s Playdom and Electronic Arts’ Playfish, which both had MAUS of less than 50m in June, according to market tracker AppData.
Zynga, like Groupon and other social network companies, has grown explosively since its founding in 2007. Gross revenues were $597m last year, versus $121m in 2009. However, that figure is substantially less than the $850m widely estimated and used as a baseline in secondary market trading.
Profits last year were $90.6m, reversing a loss of $52.8m the previous year. Profit in the first quarter of this year was just $11.8m, against revenues of $235m.
It primarily generates revenues from users buying add-ons to its games, such as FarmVille and Mafia Wars. Of its revenues this quarter, $222m were generated by game purchases, while $13m was generated by advertising.
However, it adjusted its profits and revenues to reflect an arrangement with Facebook. Facebook users pay for items in the game using Facebook Credits. Facebook keeps 30 per cent of the cost and delivers the rest to Zynga. Zynga defers those revenues.
Including that adjustment, Zynga’s earnings before income taxes, depreciation and amortisation was $112.3m in the first quarter, up from $93.5m last year. Its annual ebitda in 2010 was $392m, up from $168m in 2009.
The filing does not shed light on its hoped-for valuation, which was previously reported to be between $15bn and $20bn, based on metrics that would value its sales and growth similarly to that of LinkedIn, the business social network.
Mark Pincus, founder and chief executive, is the largest shareholder, owning 16 per cent of Zynga shares. Venture capital firm KPCB owns 11 per cent. DST Global, the Russian group that is invested in Facebook, owns about 6 per cent.
Based on a typical timetable of six weeks for approval by the SEC, followed by a week or two of marketing, Zynga could hit public markets as soon as September. It has yet to choose which market on which to list. The offering will be led by Morgan Stanley and Goldman Sachs, along with Bank of America Merrill Lynch, Barclays Capital, JPMorgan and Allen & Company.
Zynga unveils plans for $1bn IPO
ByTelis Demos in New York
Zynga, the social networking games developer, has embarked on an initial public offering of $1bn worth of shares, reporting that it generated less-than-expected revenues of almost $600m last year.
While the number of shares sold could change from the initial filing, it demonstrates the scale of the ambition of the world’s largest provider of social networking games, capitalising on Facebook’s popularity to become a hotly sought-after video game developer. It is the latest in a string of recent tech IPOs that some investors worry may be overvalued.
In its filing to the Securities and Exchange Commission, Zynga reported having 232m average MAUS, or monthly active users, or the number of people who engage with the game in a monthly period, across 166 countries in the first quarter of this year.
That puts it ahead of Disney’s Playdom and Electronic Arts’ Playfish, which both had MAUS of less than 50m in June, according to market tracker AppData.
Zynga, like Groupon and other social network companies, has grown explosively since its founding in 2007. Gross revenues were $597m last year, versus $121m in 2009. However, that figure is substantially less than the $850m widely estimated and used as a baseline in secondary market trading.
Profits last year were $90.6m, reversing a loss of $52.8m the previous year. Profit in the first quarter of this year was just $11.8m, against revenues of $235m.
It primarily generates revenues from users buying add-ons to its games, such as FarmVille and Mafia Wars. Of its revenues this quarter, $222m were generated by game purchases, while $13m was generated by advertising.
However, it adjusted its profits and revenues to reflect an arrangement with Facebook. Facebook users pay for items in the game using Facebook Credits. Facebook keeps 30 per cent of the cost and delivers the rest to Zynga. Zynga defers those revenues.
Including that adjustment, Zynga’s earnings before income taxes, depreciation and amortisation was $112.3m in the first quarter, up from $93.5m last year. Its annual ebitda in 2010 was $392m, up from $168m in 2009.
The filing does not shed light on its hoped-for valuation, which was previously reported to be between $15bn and $20bn, based on metrics that would value its sales and growth similarly to that of LinkedIn, the business social network.
Mark Pincus, founder and chief executive, is the largest shareholder, owning 16 per cent of Zynga shares. Venture capital firm KPCB owns 11 per cent. DST Global, the Russian group that is invested in Facebook, owns about 6 per cent.
Based on a typical timetable of six weeks for approval by the SEC, followed by a week or two of marketing, Zynga could hit public markets as soon as September. It has yet to choose which market on which to list. The offering will be led by Morgan Stanley and Goldman Sachs, along with Bank of America Merrill Lynch, Barclays Capital, JPMorgan and Allen & Company.
My worry with Zynga is that they are heavily reliant on Facebook; if FB were to change their games/notifications policy again Zynga would have relatively little recourse, and their prior attempts to go it alone failed.
That said, Google is an investor in Zynga and one assumes Google+ will have games sooner rather than later, so this may be something of a gamble on G+ market share also...
That said, Google is an investor in Zynga and one assumes Google+ will have games sooner rather than later, so this may be something of a gamble on G+ market share also...
