Why IPO?
Why would a mature company with significant cash flows choose equity fundraising over debt when the cost of capital on debt is so low right now? I understand equity has its own benefits, but given current market conditions it seems to be a curious choice.
They could be trying to exit, gain more efficient access to the capital markets, increase brand exposure, etc... It doesn't always boil down to the cost of capital.
liquidity is an underrated concept
ok this actually makes sense but where is the value in liquidity for the company ?
the value is generally recognized by the minority interest holders who otherwise would not have a way to recognize value of their shares. Think about it, if you own minority interest in a non-distributing LLC or non-dividend paying C-Corp, the only way to recognize value is to get majority shareholder approval to liquidate your shares, then either sell them to the current shareholder or hire an advisor to market that minority interest.
investors in the debt market may want yield, but when you enter mezz debt for these startups... that's a whole different beast.
Advantages of an IPO: -Liquidity -Ability to raise capital quickly -Brand development -Better ability to use stock as consideration in m&a -Research coverage from underwriters and other firms -Can increase investors from large-name institutions that fit your profile -Structure of equity offerings vs. debt can be favorable for operational reasons
Can you elaborate on the 5th and last points please ? doesn't coverage just add more scrutiny ?
Why do bankers bring IPOs in the middle of earnings? (Originally Posted: 11/02/2013)
This is actually a serious question. I've never worked in banking, but from the buyside perspective nothing irks me more than when bankers are bringing IPO roadshows thru right in the heart of earnings season. It seems like a terrible strategy - they must know that earnings season is absolutely the busiest part of every quarter for a buyside analyst, and as a result there is no time to actually review a prospectus with any degree of rigor. As a result, there's pretty much a 0% chance that i'd ever recommend such a deal for our funds. Do bankers realize they are leaving money on the table for their investment banking clients? Or do they just not care? It'd be interesting if there was an academic study on this, but I'd guess that companies that come public in the middle of earnings come at a 10-20% discount to comparable "well-timed" deals, just because interest levels will be lower.
I'd be interested in any perspective on this from the sell-side. Maybe this is a strong signal that the fundamentals are deteriorating so rapidly that they have to push these deals out, even when they know the timing isn't ideal. Either way, my recommendation will always be to "pass". /end rant
Reasons not to do it Lots of disclosure requirements, audit burden, short term earnings focus destroys long term value, ample access to capital for private companies
Cos theyre dicks.
I am curious about this as well. Timing of roadshow is definitely a factor. Perhaps the book runners are churning out the low priority deals from their IPO pipelines now to save the good timing slots for hot shots like twitter?
Seems legit
You're right, buysiders hate this. In fact, in my group we've all been bitching about this, there are so many deals that people can barely breathe and we all have way more important things to do.
Historically bankers didn't used to do this. the reason right now it's happening is pretty simple: it's a great market for IPOs / the market is open, and you don't know how long that lasts. It was a great market earlier in the year and then over the summer / early fall basically everything shut down, most of the deals that did go had to lower ranges and saw shitty day 1s. Right now investors will buy the deals, and send most of them up meaningfully on day 1, so if you're an issuer, you need to do it now, and if you wait till mid-november you may get unlucky and miss your window.
Yeah, just piling on here - agree that it's a total pain in the rear for buysiders, @xqtrack is probably the most right here in terms of squeezing through the window. The other thing to consider is that big long-onlies don't really care about earnings that much, and that is who, of course, you want to take the majority of the IPO deal. So to an extent, the bankers could care less whether hedge funds have time to really look at the prospectus, etc.
That said, even as a HF, if you're a sector specialist you know which private companies in your space you really want to own at the IPO, even if you haven't gone through the prospectus in a ton of detail, and will play the deals accordingly. Finally, even if you haven't gone super-deep on the name, if you think it'll be a hot deal you probably put in for a little bit just to flip the shares on the pop.
This makes sense - may be a function of experience level. I'm starting my 2nd year and still slammed ramping on industries so I don't have a high tolerance for deals, but I'd guess a couple years down the road it'll be easier to anticipate which ones I'm going to like.
That said, as someone who works at a "big long only", not sure i'd agree that we don't care about earnings. We probably don't care as much as some HFs about trying to guess the quarter in advance, but we're definitely looking for real news content/inflections etc. It's pretty damn busy - but maybe we just cover too many stocks!
From today's WSJ on this timely post: Investors return to IPOs in force. October was the busiest month for U.S.-listed IPOs since 2007, with 33 companies raising more than $12 billion. Strong investor appetites for new shares reminiscent of dot com bubble, including warm receptions for many profit-less companies. I suspect all of these have to be with the pro-longed low yield environment we have been in for some time. I wonder how long will the current IPO frenzy last. http://online.wsj.com/news/articles/SB100014240527023038431045791742824…
This Fall has also seen the return of Chinese companies listing on US exchanges.
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