The Pricing of IPOs

Comes now the triumphant case of Austin, Texas based BigCommerce who IPOed at $24/share on Tuesday. It was cause for local pride and a bit of celebration.

But, was it really?

Absorb these facts:

 1. Company comes public at $24/share and nets $216,000,000.

Well played. Bravo! Years of hard work come together. The American Dream is alive in Austin By God Texas.

 2. Stock price closed that day at $72.27/share, a nifty 201% above the IPO price in less than one full day of trading. [Helen, I think we go with the big Lexus.]

 3. On Wednesday, stock opens at $68, rewarding the folks who got a slice of the IPO and the investment bankers who bought the 15% over-allotment, the Green Shoe, for which they paid $24/share.

 4. Stock closed at $91.80/share on that same Thursday. At this price, the company’s market cap is in the $7B range. A lot of value was created for the founders and the venture capitalists who threw in over $200MM to build this baby.

I love the smell of capitalism in the morning.

For those doing the math, confirm that the $24/share to $91.80/share run is a 283% gain. Not a bad performance for two days.

Somebody made some money, the question is: Who?

So, what’s the beef, Big Red Car?

The beef, dear reader, is that the investment bankers who handled this deal grossly undershot the IPO price. 

They told their client that it would sell out at $24/share generating the company $216MM in gross proceeds whilst clearly the market wanted this baby with a hunger and a lust that is reflected in the first day pop to $72.27.

The distribution syndicate for an IPO is not stupid. They do not pick numbers out of their ass.

They troll the prospectus around to their best customers, generate interest, make clucking noises, look wise, circle a number that ensures the stock gets sold, pencil in some orders, and report back to the investment bankers (their colleagues in this game of Three Card Monte) and GIVE THEM THE NUMBER.

It is, unfortunately, more and more becoming a number at which there will be a BIG POP and at which that Green Shoe will earn everybody a very nice bonus, which conjures up the question: “Exactly who the fuck are these guys working for?”

[Cheat sheet answer, “They are working for themselves. They have been doing this for years and years. They have a room full of trophies. They know that BigCommerce will only do this once. They have an enormous knowledge advantage and they use it.]

Would this IPO not have sold out if it had been priced at $48/share, thereby generating $432MM for the company?

That would have allowed for a still substantial first day pop, no? So, why not?

The Green Shoe

I am also bothered by the Green Shoe, the over allotment, whereby the investment bankers can gobble up 15% additional shares at the offering price.

These boys likely sold those shares at the end of the second day to their buddies at the then market price. [Helen, get the boat also. The one with the teak trim.]

Can you say “conflict of interest,” Batman?

Who is BigCommerce anyway, Big Red Car

BigCommerce (BIGC) is a SaaS ecommerce platform that connects ecommerce stores to online marketplaces, social networks, and offline point-of-sale systems. It has 60,000 online store customers in 120 countries. It touts itself as being a comprehensive platform for launching and scaling an ecommerce operation.

Big Commerce Website

BIGC will provide store design, catalog management, hosting, checkout, order management, reporting, walk your dog (no Shih Tzus, they’re too smart) and integrates with third-party payment, shipping, and accounting providers.

You kiss BigCommerce on the cheek and you end up with a beautiful baby without having to wait nine months.

Bottom line it, Big Red Car

Amongst all the injustices in life, please add the faux pricing of IPOs that create a lovely first day pop and which grossly underprice the value of the shares thereby screwing the issuer out of money they have earned through years of hard work.

It just isn’t right.

But, hey, what the Hell do I really know anyway? I’m just a Big Red Car. If you decide to go public get right in the middle of that black art syndicate desk pricing con, cause you can make some money by knowing with whom you are dealing.