With the real possibility that we may be seeing storm clouds forming on the stock market horizon, some of the major IPOs of 2019 are moving up their launch dates.
One of the most important consideration in looking to launch a company’s IPO, or initial public offering, is the timing of the release. Companies and their investment bankers who they hire to handle the placement of an IPO spend a lot of time and effort trying to pick the best time to do this, looking for the right market conditions, or at least avoiding the clearly wrong ones.
This is more than just looking to get a good price for the company for these shares, although that does matter. This is what most people think of as far as the timing of an IPO goes, but there’s more involved and more at stake than just this one thing.
We need to look into the real rationale behind a company going public to discover why it’s not just the initial price that matters, the money that the company gets for these initial shares. This may not even add that much to a company’s cash reserves, like was the case with Levi Strauss’ recent IPO, the first of the major ones this year.
The way this particular deal was structured, Levi Strauss actually only got $161 million out of this, not even enough to make much of a difference for a company of this size, especially with their over $700 million in cash they held before these shares were issued.
The Haas family, on the other hand, put three times this in their own pockets, and that really epitomizes what these deals are all about, which is to allow private shareholders to get a big payday. This goes well beyond the initial deal though.
What these shareholders are really looking for is to have the company stock that they own grow a lot in price after these shares are released. There is a period where they cannot sell them, which varies deal by deal, so that an IPO doesn’t get released and then have company people line up to sell thier holdings, which would have a big downward effect upon the fledgling stock.
It’s in the interests of the shareholders to delay this though, as the hope and the plan is that when they get to go, the price of their shares will be run up quite a bit indeed, meaning an even bigger payday for them.
Why IPOs Are Priced to Please So Much
We may also wonder why IPOs can go up so much from their initial price, especially in early trading. This is by design as well, and by pricing an IPO below its market value, this not only serves as a perk to the big institutional investors to get them on board, who can also offer these shares to their clients as a value-added perk, it also creates some real momentum to get the rest of us more likely to jump on board.
Levi Strauss rose 32% over its issue price of $17 the first day, and this represented that initial value that was held back, although IPOs don’t always go off this well. The conditions need to be right as well, and we can say that they are at least pretty good now, but you really wouldn’t want to do this when the market is tanking, when money is moving out of stocks to a large degree.
The part that isn’t so obvious is that you also don’t want to release an IPO when the market expectations over the next few months aren’t so good. An initial boost like this only matters to the private shareholders if it is maintained and hopefully increased during the period where these shareholders aren’t allowed to trade, to allow this all to be leveraged in the manner that benefits the owners who are looking to cash in on their stock.
With at least some believing that a recession may be on the horizon, and with the market at least tiring somewhat after a very long run of 10 years in length, other companies who had planned on releasing their IPOs later in the year and now looking to step things up and reduce their risk.
Pinterest was scheduled to release theirs on June, but we’re now hearing that they are going to move this up to as early as next Friday. These are not decisions that can be made out of the blue, as there is a lot of preparation involved with an IPO, so this means that they’ve actually been thinking about this for some time.
Uber Technologies is also feeling the pressure, and the latest word is that their IPO is likely to hit the market sometime this spring. It’s spring already so that one may be on tap pretty soon as well.
Lyft, another major IPO for 2019, may also act with more haste, although they haven’t officially released any expectation of exactly when. We Work is another fairly major IPO company who are still weighing their options, although if these companies wait too soon, they may have to wait quite a bit longer.
During last year’s selloff, this was obviously not a time to be doing any of this, but now that things have improved so much, the bell that calls companies to do this is starting to ring again. We just don’t know how long it will last, and once you are in, you are in for the duration.
IPO Investing Requires Greater Care
IPOs do add potential value to companies who may not be doing that well now and derive their value from future potential, and Uber is a perfect example of this. In spite of their very impressive footprint these days, with revenues growing larger and larger each year, and now up to over $11 billion in 2018, they are still losing money hand over fist.
We can therefore see this as an attempt for the company to raise more money, an opportunity for shareholders to cash in, or both. It is usually both, and we need to be aware that the biggest reason may indeed be for those who own stakes in these companies to fly the coop with at least some of their equity while the getting is still good.
Uber is a company like Tesla who have been doing what they do for a long time now and people are now starting to wonder when they will actually make money. Uber’s loss of $1.8 billion in 2018 might be an improvement from the $2.2 billion it lost in 2017, but that’s still a lot of money to lose. We love technology companies and especially ones that innovate, but we also need to not get caught up too much with the hoopla if our view is long-term, at least until things get more stable.
The exuberance of an IPO might be just what the doctor ordered though to help them out of these messes, and those who see Uber making a lot of money some day now have the opportunity to place their bets and put a price on this perceived value at least. Time will tell how well Uber and competitor Lyft will end up doing in the future, but a public stock offering will at least offer another way for them to raise the money they need to stop the bleeding, and especially a better option to Lyft’s expensive junk bonds.
This does hit home the importance of not seeking to do too much with our IPO shares, and especially be careful in managing the amount of risk that we take on when investing in them. IPOs are more like a ride that you have to be this tall to get on, and are not suited for everyone, especially conservative investors who will insist on staying on the ride beyond the point where it would be sensible to get off.
This does not mean that they cannot be both fun and profitable, especially on the way up, but when the ride starts to get too wild and especially moves downward, we need to make sure that we are thinking safety first.