High Valuations Didn’t Tank Tech IPOs
The real problem was information widely available only to private investors. And the SEC is out to lunch on the issue.
As the prices of much-vaunted tech stocks such as Facebook, Groupon and Zynga continue to plummet, their high valuations have become the lightning rod of disgruntled investors.
But blaming high valuations for the drop in share prices is the easy way out. The pre-IPO market for Facebook, Groupon and Zynga was rampant with information — about private trades on exchanges such as Second Market and Shares Post, the prices that these shares were trading at, and private guidance that the companies and sell-side analysts were providing to their closest investors.
If such information was transparently available to all investors — mandated by the SEC — investors might have behaved differently. And much of the bloodbath that has been the post-IPO tech market could have been avoided.
Although the SEC says it wants greater transparency of information and increased disclosure, it seems to be caught in a time warp over IPO regulations. It continues to pore over the filings but seems to ignore the impact of social media in making information accessible to all.
CNBC’s Gary Kaminsky, who himself managed over $13 billion in assets at Neuberger Berman, believes that the environment has become so charged with unabashed boosterism and uncontrolled trading on the private exchanges, such as Shares Post and Second Market, that bankers are in a total quandary. They are limited in what they can do.
Insiders, of course, want the highest valuation they can command, especially if they plan to sell at the IPO or soon after. The company wants a high value — to raise as much capital as it can — but still leave some upside for new investors. But if high share prices have already been established on the private exchanges, companies and their bankers have little flexibility. With Facebook shares rumored to be traded on the private exchanges at well above $40 well before the IPO, how much flexibility did Morgan Stanley have in pricing the IPO, Kaminsky asked last month in New York City.
Hyped valuations are not new but don’t necessarily always fall. Much ballyhooed Google had a post-IPO valuation of $27 billion, but its current valuation is over $221 billion. Similarly touted Amazon had a post-IPO value of $438 million. Now it is valued at over $110 billion. But both in the short term and in the long term, they delivered. And investors felt that they had enough information to decide whether to buy or not to buy.
“People make too much of valuations. It’s simply supply and demand,” says veteran Wall Street banker Joseph Cohen. “It was true in the ‘80s and ‘90s; its just as true now.” Cohen should know. As managing partner of Cowen & Co., he engineered its sale to French bank Société Générale in 1998 at more than four times book value — one of the highest valuations ever given to an investment bank. Cohen believes that investors, especially professional investors, are quite capable of informed decision making. “Those who didn’t like Facebook’s valuation wouldn’t buy it,” he says.
Indeed, as more information on Facebook, Zynga and Groupon has become available, investors have bailed out of the stock. Facebook which went public at $38 is now trading at less than $20, half its IPO valuation of $104 billion. Zynga has dropped 70 percent to about $3 a share and Groupon is down from its $20 IPO price to $4.
Facebook founding investor Peter Thiel recently sold 20.6 million shares of Facebook — for which he paid $500,000 — at $19.73 a share. Earlier in the summer, Groupon investors Andreessen Horowitz dumped most of their Groupon holdings as well.
To be fair, sales by insiders, especially if they have been holding their shares for some time, are more than justified. But selling at the bottom of the market raises questions about what they know that others don’t.
A 59-year old Wall Street banker who lives in Greenwich says that dozens of people at his health club asked him whether Facebook was a good buy when Morgan Stanley was promoting the company’s IPO. “I told them to wait about a month because the stock would be down 35 percent,” the banker says.
The banker now admits he was off on his timing but more than right about the drop in price. “The stock was wildly overvalued and still is,” the banker maintains. If investors had all the information that the insiders had, they too would have made a similar determination.