By Michelle F. Davis
Wall Street saw 2019 as a harvest year, finally bringing the long-awaited public debuts of many of the hottest startups -- and the healthy fees and deal prestige that came with them. It hasn’t gone as planned.
Fitness startup Peloton Interactive Inc. on Thursday became the latest major initial public offering to fall on its face, dropping 11% on its first day of trading. Hours later, Endeavor Group Holdings Inc. pulled its U.S. IPO after downsizing the listing.
That trend -- most notable in the declines of ride-sharing giants Uber and Lyft -- has accelerated in recent weeks, with SmileDirectClub posting the worst opening trade for a big IPO in more than a decade and WeWork forced to delay its listing because of tepid demand.
The market flops underscore a common disconnect between valuations in public and private markets -- a reality check for banks that have long touted lofty appraisals to company founders in the hopes of being hired for their IPOs.
Their incentive is clear: Public offerings of unicorns offer some of the fattest fees in banking, along with a chance to reward top clients and drum up trading activity. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among banks that are expected to split about $60 million in fees from helping Peloton raise $1.16 billion.
But the high-profile misfires threaten to upset banks’ investor clients and stifle repeat business. They’ve also convinced some venture capital firms to plan more deals as direct listings, which don’t raise fresh capital and carry lower fees for the banks.
“Underwriters do misprice stocks,” said Howard Mason, a bank analyst at Renaissance Macro Research. “The risk is when you get valuations bid up to a point that is unworkable for the public markets.”
Mason said that “self corrects” for individual stocks with share-price declines, “but as you go through the correction period there’s a bunch of companies that are hung, which instead of contributing to the IPO pipeline just disappear forever.”
Uber, Lyft
The price slumps may say less about the bankers’ skill than investors’ appetite for startups that have prioritized growth over profitability. Whatever the culprit, top IPO banks including Goldman Sachs, Morgan Stanley and JPMorgan have all stumbled on big-name deals.
Uber Technologies Inc., Lyft Inc. and SmileDirectClub Inc. are all down more than 29% from their offer price. WeWork’s parent, We Co., was aiming for the second-biggest listing of the year at $3.5 billion. Instead, co-founder Adam Neumann has resigned as chief executive officer and the company will probably put off an IPO until at least next year, people familiar with the matter have said.
As a group, this year’s IPOs have been lagging behind the market, climbing 6.5% from their offering prices on average, while the S&P 500 has gained about 19%.
Fees from equity underwriting at 12 of the biggest global investment banks dropped 12% in the first half of 2019, driven by the IPO business, according to data from Coalition Development Ltd. That was a steeper drop than from debt underwriting or merger advisory, which also posted declines.
Stock underwriting was never going to single-handedly reverse Wall Street’s fortunes, because it’s the smallest piece of the investment-banking business, which itself brings in less than equity or fixed-income trading. But the slump is adding to pain caused by lower trading activity and a dip in mergers and acquisitions.
“I think we’re getting to the point where the industry is already consolidated, so now the big guys will have to think about a different business model,” Mason said.
And it’s not the only area where the banks are having trouble pulling off transactions that make all sides happy. At least four junk-debt deals have been pulled this month, and several others had to ratchet up interest rates or dangle sweeteners to drum up investor demand.
While misfires by brand names like Uber or Peloton steal headlines, smaller or lesser-known deals have been resilient, such as Datadog Inc. Most of the U.S. IPOs that have priced since the start of August have risen above their offering prices in the opening trade of their debut session, according to data compiled by Bloomberg.
“It’s still a very profitable business for banks and will continue to contribute to results,” said Jason Goldberg, an analyst at Barclays Ltd.
Wall Street saw 2019 as a harvest year, finally bringing the long-awaited public debuts of many of the hottest startups -- and the healthy fees and deal prestige that came with them. It hasn’t gone as planned.
Fitness startup Peloton Interactive Inc. on Thursday became the latest major initial public offering to fall on its face, dropping 11% on its first day of trading. Hours later, Endeavor Group Holdings Inc. pulled its U.S. IPO after downsizing the listing.
That trend -- most notable in the declines of ride-sharing giants Uber and Lyft -- has accelerated in recent weeks, with SmileDirectClub posting the worst opening trade for a big IPO in more than a decade and WeWork forced to delay its listing because of tepid demand.
The market flops underscore a common disconnect between valuations in public and private markets -- a reality check for banks that have long touted lofty appraisals to company founders in the hopes of being hired for their IPOs.
Their incentive is clear: Public offerings of unicorns offer some of the fattest fees in banking, along with a chance to reward top clients and drum up trading activity. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among banks that are expected to split about $60 million in fees from helping Peloton raise $1.16 billion.
But the high-profile misfires threaten to upset banks’ investor clients and stifle repeat business. They’ve also convinced some venture capital firms to plan more deals as direct listings, which don’t raise fresh capital and carry lower fees for the banks.
“Underwriters do misprice stocks,” said Howard Mason, a bank analyst at Renaissance Macro Research. “The risk is when you get valuations bid up to a point that is unworkable for the public markets.”
Mason said that “self corrects” for individual stocks with share-price declines, “but as you go through the correction period there’s a bunch of companies that are hung, which instead of contributing to the IPO pipeline just disappear forever.”
Uber, Lyft
The price slumps may say less about the bankers’ skill than investors’ appetite for startups that have prioritized growth over profitability. Whatever the culprit, top IPO banks including Goldman Sachs, Morgan Stanley and JPMorgan have all stumbled on big-name deals.
Uber Technologies Inc., Lyft Inc. and SmileDirectClub Inc. are all down more than 29% from their offer price. WeWork’s parent, We Co., was aiming for the second-biggest listing of the year at $3.5 billion. Instead, co-founder Adam Neumann has resigned as chief executive officer and the company will probably put off an IPO until at least next year, people familiar with the matter have said.
As a group, this year’s IPOs have been lagging behind the market, climbing 6.5% from their offering prices on average, while the S&P 500 has gained about 19%.
Fees from equity underwriting at 12 of the biggest global investment banks dropped 12% in the first half of 2019, driven by the IPO business, according to data from Coalition Development Ltd. That was a steeper drop than from debt underwriting or merger advisory, which also posted declines.
Stock underwriting was never going to single-handedly reverse Wall Street’s fortunes, because it’s the smallest piece of the investment-banking business, which itself brings in less than equity or fixed-income trading. But the slump is adding to pain caused by lower trading activity and a dip in mergers and acquisitions.
“I think we’re getting to the point where the industry is already consolidated, so now the big guys will have to think about a different business model,” Mason said.
And it’s not the only area where the banks are having trouble pulling off transactions that make all sides happy. At least four junk-debt deals have been pulled this month, and several others had to ratchet up interest rates or dangle sweeteners to drum up investor demand.
While misfires by brand names like Uber or Peloton steal headlines, smaller or lesser-known deals have been resilient, such as Datadog Inc. Most of the U.S. IPOs that have priced since the start of August have risen above their offering prices in the opening trade of their debut session, according to data compiled by Bloomberg.
“It’s still a very profitable business for banks and will continue to contribute to results,” said Jason Goldberg, an analyst at Barclays Ltd.
Get Unlimited Access to The Economic Times
