By Corrie Driebusch
Many businesses are struggling. Millions of Americans are out of
work. But the IPO market is the hottest it's been in years -- and
2020 could be its biggest year ever.
With three months left on the calendar, U.S.-listed initial
public offerings have raised nearly $95 billion through Wednesday,
according to data provider Dealogic. That already surpasses the
totals of every year except 2014 since the tech bubble in 2000.
It's nipping at the heels of 2014, when IPOs raised $96 billion,
more than a quarter of it by Alibaba Group Holding Ltd.
Bankers, lawyers and executives say that if the frenetic pace
keeps up, 2020 will eclipse the tech-boom years of 1999 and 2000,
when investors feverishly pumped money into burgeoning internet
stocks before they crashed to Earth.
Investors are gobbling up these new listings, with this year's
IPOs posting the biggest gains during their trading debuts since
2000, at 22% through Wednesday. On average, 2020 IPOs have risen
roughly 24% from their original prices.
The fortunes of the IPO market have never been more divergent
with the state of the U.S. economy. The coronavirus pandemic sent
businesses into free fall, pushing unemployment to its highest
level ever this spring. But it also caused a shift in the economy.
With everyone relying more on technology for work, school and
everyday communications, the value of companies providing related
services pushed higher. And with low interest rates limiting
returns on traditionally safe investments like bonds, investors are
looking for ways to make money wherever they can.
This year, more than 80% of the money raised by initial public
offerings falls into three buckets: healthcare, technology and
newly popular blank-check companies -- shell firms whose only
purpose is to acquire a private target and take it public. That is
the most concentrated the IPO market has been since 2007, according
to Dealogic, when new listings of banks and lending institutions
flooded the market before the financial crisis.
More than 235 companies have joined the U.S. public markets this
year, on track for the most since 439 companies went public in
2000, according to Dealogic. They'll soon be joined by giants
Airbnb Inc. and Palantir Technologies Inc., which will go public
later this year after long tours as private companies.
Even Warren Buffett, America's most well-known value investor,
who typically avoids investing in startups, is participating.
Mr. Buffett's Berkshire Hathaway Inc. bought roughly $735
million in shares of data-warehousing company Snowflake Inc.'s
public offering. Shares finished their first day of trading on
Sept. 16 at more than $250 apiece, more than double their IPO price
-- making it the biggest tech IPO of the year. At the end of that
first day, the company had a market value of $70.4 billion. Mr.
Buffett's stake was worth nearly $1.6 billion.
The state of the IPO market is a huge reversal from just a few
years ago, when many venture capitalists and CEOs had declared the
initial public offering all but dead. For more than a decade,
companies opted to raise giant amounts in the private markets, made
possible thanks to large funds such as SoftBank Group Corp.'s $100
billion Vision Fund. Staying private allowed startups to avoid the
hassle of regulatory disclosures and prevented them from having to
answer to public shareholders. In 2016, IPOs and their investors
raised less than $25 billion.
Now companies are growing wary of staying private too long after
watching some marquee IPOs, like Uber Technologies Inc. and Lyft
Inc., struggle last year. Public investors are also rewarding
high-growth companies with big valuations they are unlikely to
fetch in the private markets -- a change from a few years ago.
Companies are now trying to hit a sweet spot, going public after
they've had a chance to mature a bit but before their strong growth
trajectory has slowed.
The market is less ecstatic than the feverish tech bubble that
infused massive amounts of capital into internet companies like
Pets.com, which then burned through cash and collapsed just months
later, devastating the stock market. Still, companies that had
previously written off a 2020 IPO are forging ahead this year,
hoping to ride the wave. Others are planning public debuts in the
first half of 2021.
New alternatives
The process of going public is changing as well, after remaining
mostly the same since the 1980s.
"It used to be a formulaic conversation about the path to going
public," said Bennett Schachter, who heads global alternative
capital solutions at Morgan Stanley. Those stages tended to be a
series of fundraising rounds, perhaps a private placement to
pre-selected investors, a so-called crossover financing round that
involves investors that mostly work with public companies, followed
by an IPO. "Now there is this broader and increasingly
well-accepted spectrum of alternatives."
Blank-check companies have exploded this year as an alternative
to the traditional IPO, accounting for more than 40% of the money
raised in IPOs this year. That compares to an average of 9% over
the previous 10 years, according to Dealogic.
Kevin Hartz, co-founder of Eventbrite Inc., was an early
investor in Airbnb, Uber and Pinterest Inc. This year he decided to
launch a blank-check company.
His first official meeting with bankers about his venture was in
mid-June, he said. Less than two weeks later, he said, he filed
confidentially with the Securities and Exchange Commission and by
the end of July his filing was public. Roughly 60 days after that
June meeting with bankers, Mr. Hartz's blank-check company had
raised $200 million and almost immediately started reaching out to
founders of companies with whom he may want to merge. He said he
was amazed how quickly he was able to turn his idea for a
blank-check company -- also known as a special-purpose acquisition
company, or SPAC -- into reality.
"SPACs have the possibility to be the leader in the future," he
said, noting one of their biggest benefits for founders is that in
a reverse merger, a startup can provide shareholders with earnings
and growth projections for the future. In a traditional IPO that
isn't allowed.
Another alternative more companies are exploring is going public
through direct listings -- in which they list employees' and
investors' existing shares on the open market, allowing them to
potentially cash out their stakes. That lets companies avoid
investment banks' big fees for underwriting an IPO, but doesn't
allow them to raise additional money.
Palantir, the big-data company co-founded by billionaire Peter
Thiel, will complete a direct listing later this month in one of
the biggest market debuts of the year, at an expected value of $22
billion. Software company Asana Inc. is also planning to go public
via a direct listing later this month.
Previously, just two major companies had ever gone public that
way. Spotify Technology SA, which went public in 2018, spent much
of its first two years public trading below its first-day closing
price, though its shares have soared since this spring. Slack
Technologies Inc., which went public in 2019, remains below its
first-day closing level.
The other blockbuster name set to go public this year,
house-sharing giant Airbnb, had also planned a direct listing for
its 2020 IPO. It had to change plans when the pandemic forced
executives to raise additional money, according to people familiar
with the matter. A spokesman for Airbnb declined to comment.
The rules could soon change. In late August, regulators approved
a proposal from the New York Stock Exchange to let companies raise
capital through direct listings, though the approval recently hit a
snag due to objections from a large investor group. The option
would remove a key barrier for companies, making direct listings
even more attractive, according to people familiar with the matter.
Nasdaq Inc. has filed a similar proposal.
"There's been more innovation in the last two years than in the
last two decades," said Stacey Cunningham, the president of the New
York Stock Exchange. "There is a renaissance in the IPO
market."
Social-distancing measures to avoid the virus have also shaken
up the process. The typical IPO roadshow spanned a grueling eight
to 10 days when executives traveled the globe and peddled their
wares to prospective investors in conference rooms. Now, roadshows
are typically shorter and entirely virtual, enabling more investors
to participate than ever before.
When online insurance broker SelectQuote Inc. listed its shares
on the NYSE in May, it used a four-day virtual roadshow. "Who
would've thought you could raise $350 million in your pajamas from
the comfort of your home?" the company's CEO, Tim Danker, said.
Market shifts
Pandemic-induced shifts in the public and private markets helped
usher in the IPOs. As the country shut down earlier this year, the
availability of private funding became more scarce. Some executives
struggled to raise money at the valuations they wanted. In the
second quarter, there was a sharp rise in the number of startups in
the private market completing so-called down rounds, or funding
rounds where the valuation based on the share price dropped
compared with the prior round.
The public funding markets, including the IPO market, also
seized up briefly in early March, but swift moves by central banks
around the world restarted the flow of money. After the S&P 500
hit its 2020 low in late March, a bond-buying intervention from the
Federal Reserve helped companies raise cash -- and enthusiastic
bets from individual investors helped drive up shares of big tech
companies and propel major indexes higher. Bankers and corporate
executives took advantage of the optimism, rushing out companies
that had been aiming for early spring IPOs.
To ensure these IPOs went smoothly, companies and their bankers
lined up institutional investors, including T. Rowe Price Group
Inc. and Fidelity Investments, to commit to buying large portions
of the company either ahead of the IPO or as part of the public
offering. Fund managers told The Wall Street Journal that after a
choppy spring that hammered some of their portfolios, they were
happy to be able to buy into IPOs, which tend to outperform the
broader stock market.
Shares of companies that went public in late May and early June
soared, leading a bevy of new issuances this summer. The New York
Stock Exchange said August, typically a sleepy time for IPOs, was
its busiest month since October 2013.
This spring also brought a surge in financing for blank-check
companies -- a sign that there's more demand for IPOs this year
than there are companies able to quickly go public.
While the niche has been around for many years, it often wasn't
taken seriously. Their legitimacy was bolstered over the past year
after high-profile companies like Virgin Galactic Holdings Inc. and
DraftKings Inc. went public through reverse mergers with
blank-check firms.
Their structure tends to offer a big payday to the blank-check
company's sponsors even if shares fall. Typically, those sponsors
are awarded shares equivalent to about 20% to 25% of what is raised
in the IPO at the time the target is bought. Some newer blank-check
offerings are reducing their cut of the deal. Blank-check IPOs also
haven't always performed well; historically, many traded below
their offer prices, and deals they strike aren't always approved by
shareholders. The newest generation of blank-check sponsors say
they want to change that.
The case of electric-truck startup Nikola Corp. shows how risks
remain. One of this year's high-profile IPOs through a blank-check
company, it is now embroiled in legal and stock-trading woes, with
the Justice Department examining allegations that it made
exaggerated claims about its technology. A spokeswoman for Nikola
declined to comment. Shares have tumbled, but remain above the
level they traded when their merger deal was announced.
Meanwhile, struggling streaming-video service Quibi is
considering a reverse-merger with a blank-check company to go
public, The Wall Street Journal reported Monday.
Vivek Ranadivé is no stranger to capitalizing on an IPO boom. In
1999, the tech entrepreneur brought his company, Tibco Software
Inc., public and watched shares double during their first day of
trading. Since then, the software entrepreneur sold Tibco to a
private-equity firm in 2014, stayed involved in the world of tech
investing and became majority owner of the Sacramento Kings.
In February, Mr. Ranadivé attended the NBA All-Star Game and ran
into some investors who told him he should try his hand at a
blank-check company. At first, he was skeptical.
"A SPAC was a sleazy thing 20 years ago," he said. Then the
pandemic hit with full force, and the timing seemed perfect to
launch a SPAC of his own. So he did.
This summer, Mr. Ranadivé raised more than $480 million for his
new blank-check company. Now he is on the hunt for a target to
buy.
--Graphics by Ana Rivas
Write to Corrie Driebusch at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
September 25, 2020 13:01 ET (17:01 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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