Here we go again. You’d think that proliferation of direct listings and SPACs last year that enable founders, venture capitalists and big investors to take enterprises public their way would be loosening Wall Street’s grip on the IPOs––a longstanding bonanza for investment banks. But in 2020, 194 tradtional IPOs, the highest total since 2014, got done the old fashioned way, with the bankers frequently selling shares at bargain prices to their prized customers, who cleaned up from a parade of first day pops that resounded among the biggest ever. According to data posted by Jay Ritter of the University of Florida, an expert on IPOs, no fewer than 12 offerings in 2020 left $500 million or more “on the table.” In those dozen deals, the owners collected between half-a-billion and three-and-a-half billion dollars less than if they’d gotten the price where their shares settled at the close of the opening day of trading.
The latest true-to-form example is the biggest offering so far this year, the Nasdaq debut of Affirm Holdings on January 13. Affirm provides financing for online purchases to customers who don’t have savings accounts or credit histories, and might otherwise not be denied credit. Its founder and CEO is Max Levchin, who launched PayPal with Peter Thiel, whose Founders Fund is a major investor.
Initially, Affirm announced in a January 5 filing that it expected the lead underwriters, Goldman Sachs, Morgan Stanley and Allen & Co., to price its shares at between $33 and $38. Eight days later, in its offering prospectus, Affirm disclosed that the range had jumped to between $41 and $44. And on January 11, the day before the IPO, Affirm announced in a press release that its bankers had pre-sold the offering at $49. The research and advisory firm IPO Boutique reported that the deal was “multiple times over-subscribed, with very strong momentum from the roadshow.”
The shifting prices illustrates the principal problem with traditional IPOs: Pricing isn’t set by a sale that invites all the folks and funds interested in buying to bid, but instead empowers the bankers to reserve deals for the hedge funds and money manager that give them the most business. “The fat cats get the rich milk,” as one CEO who took his company public told me. “Multiple times over-subscribed” is code language for getting a sweet deal. Freedom doesn’t ring in IPOs. “The system creates a perverse incentive for the investment bankers to underprice the offering,” says another former CEO who went through the process.
Affirm sold 24.6 million shares at the $49-per-share that big investors paid in the offering. After paying its underwriters $54 million, or 4.5% in fees, Affirm raised $1.151 billion. But on its opening day of trading, when all and sundry got a chance to buy, its shares soared $48.24 or 98.4% to close at to close at $97.24. So Affirm left $1.187 billion (24.6 million shares at $48.24) on the table. In effect, it cost $1.03 in foregone cash (not including the underwriting fee) for every dollar Affirm pocketed from the offering.
In the great IPO march of 2020, only four newcomers sacrificed more cash than Affirm, Airbnb ($3.94 billion), Snowflake ($3.75 billion), DoorDash ($2.9 billion), and Royalty Pharma ($1.28 billion). In its prospectus, Affirm reported revenues of $510 million in the year ended June 30, and a loss of $113 million. It forecasts that its cash trove will rise to $1.67 billion following the offering. Had Affirm gotten the full, first day value for its shares, its war chest would be brimming with an extra $1.2 billion in reserves to fund its losses and back new investments. At the January 13 close, Affirm’s fully-diluted market cap was just shy of $24 billion. That foregone cash would have raised its net worth by $1.2 billion, and hence likely added $5, or 5% to its stock price.
Indeed, Wall Street’s club for IPOs works in wondrous ways. But it’s long past time for a lot less wonder, and a little more transparency.