Link to WSJ.com article (subscription requred): http://online.wsj.com/article/SB10001424052702304821304577436770415313132.html?
Kayak Software Corp., the travel website aggregator, has delayed the road show for its initial public offering, according to reports. This follows Facebook's under-performing IPO, which could be casting a chill on the technology IPO market. Kayak originally planned to go public last year, but postponed its IPO citing market conditions.
Link to Businessweek article:
Link to WSJ.com article (subscription requred): http://online.wsj.com/article/SB10001424052702304821304577436770415313132.html?
AllThingsD reports that Salesforce.com is close to a deal to acquire Buddy Media, a venture capital-backed company that provides social media marketing services for enterprises. According to the article, Buddy Media is being valued at more than $800 million. In its most recent funding round in August 2011, Buddy Media was valued at $500 million. According to a TechCrunch article, as of last year Buddy Media projected a revenue run rate of $100 million for 2012. This suggests an 8x forward revenue multiple for the acquisition.
GigaOM calls this a "smart play" for Salesforce.com as CRM is evolving past its sales process roots to include branding, social media interactions and marketing for customers.
Venture capital investors in Buddy Media include Bay Partners, GGV Capital, Greycroft Partners, Insight Venture Partners, Institutional Venture Partners and SoftBank Capital.
Link to AllThingsD article:
LInk to the TechCrunch article: http://techcrunch.com/2012/05/29/salesforce-acquires-buddy-media/
Link to the GigaOM article: http://gigaom.com/2012/05/29/salesforce-close-to-buying-buddy-media-for-800m/
The New York Times has an interesting article on New York's thriving technology start-up scene. "For Tech Start-Ups, New York Has Increasing Allure" outlines how New York's tech start-ups benefit from being close to the media, advertising and fashion industries, and that it has grown to the point of being an attractive alternative to Silicon Valley.
I've previously posted about NY's tech scene. Here's a link to a post on a digital map of NY digital start-ups and venture capital firms: http://www.allenlatta.com/1/post/2012/5/new-york-digital-start-up-and-vc-map.html.
Here's a link to a prior post on NY's tech scene: http://www.allenlatta.com/1/post/2011/11/new-yorks-technology-scene-ny-times.html
Link to the NY Times article: http://www.nytimes.com/2012/05/28/technology/for-tech-startups-new-york-has-increasing-allure.html?
As a former corporate lawyer, it pains me to see esteemed law firms crumble. Dewey & LeBoeuf has filed for bankruptcy, in what is apparently the largest law firm bankruptcy in history. According to the press release, Dewey will wind down as opposed to restructuring. According to Bloomberg, the firm had debts of $245 million and assets of $193 million. After the 2007 merger of Dewey Balantine and LeBoeuf, Lamb, Green & McRae, the firm had over 1,300 attorneys in 12 countries.
Link to press release: http://www.prnewswire.com/news-releases/dewey--leboeuf-llp-files-for-chapter-11-protection-seeks-orderly-wind-down-of-business-155192345.html
LInk to Bloomberg article:
In another sign that San Francisco is a booming center for technology start-ups, Benchmark Capital is opening an office above the Warfield Theater, a popular concert venue, on Market Street by Taylor Street. The new satellite office will be just blocks away from Benchmark's portfolio company Twitter, when their build-out is completed. Here's the story by the Washington Post: http://www.washingtonpost.com/business/twitter-joined-in-san-francisco-by-one-of-its-biggest-investors/2012/05/25/gJQAMnQJqU_story.html
Facebook's stock is currently trading at roughly $31.50 per share. It priced its initial public offering a week ago at $38 per share, opened trading at $42.05 per share and traded as high as $45 per share. None of Facebook's underwriters have initiated equity research coverage on Facebook, but a number of analysts not involved in the offering have, with a range of target prices of $49 all the way down to $9.50 (see article here). In addition, Henry Blodget, former Internet equity research analyst, estimates that Facebook should trade between $16 and $24 per share.
Link to Henry Blodget article (which has a good analysis):
Link to CNBC article on analyst projections:
Mark Suster, a Partner with GRP Partners, has an interesting post on his blog entitled "It's Morning in Venture Capital." In this post he outlines several factors why now is a good time to be in the venture capital business. It's an interesting piece and worth a read. Here's the link: http://www.bothsidesofthetable.com/2012/05/23/its-morning-in-venture-capital/
Last week, Facebook priced its initial public offering at $38.00 per share. Last Friday (May 18), Facebook stock began trading, and the initial trade was at $42.05, a "pop" of over 11%. However, Facebook's stock price became volatile, and soon fell to the IPO price of $38. It ended the day at $38.23 per share. Many press accounts indicated that Morgan Stanley stepped in and purchased shares to stabilize the price. Some press accounts stated that Morgan Stanley exercised the over-allotment option in the process. This last statement is incorrect and demonstrates that many people in the press don't fully understand post-IPO price stabilization and the use of the over-allotment option. This post attempts to shed some light on the matter.
First, and importantly, the IPO price is a sacred thing. The company, investors and the lead IPO underwriter all want to see the stock trade up in the after-market. When a stock trades up in the aftermarket, everyone wins. However, when a stock price falls below the IPO price, the IPO is considered "broken," the company and investors are disappointed and the lead underwriter suffers reputational damage (with the company, with institutions buying the IPO, with future IPO clients, etc.). In addition, it is common for lawsuits to occur when a stock falls below the IPO price in the first days of trading (see today's news article about the first lawsuits filed in the Facebook IPO). For these reasons (and more), it is customary for the lead underwriter to work to "stabilize" the market and keep the stock price above the IPO price. This is called IPO price stabilization and it works due to the existence of a misunderstood tool called the over-allotment option (it's also known as a Green Shoe after the first company to use this mechanism).
As part of the IPO, the company will grant the underwriters an over-allotment option to buy additional shares from the company that can be exercised for up to 30 days after the IPO. This over-allotment option is typically for a number of shares equal to 15% of the shares offered in the IPO, and has an exercise price equal to the IPO price. Then, armed with this over-allotment option, the underwriters go and sell the IPO. But what they really do is sell more shares than are indicated in the prospectus (yes this is legal), and oversell the IPO by 15% (equal to the number of shares covered by the over-allotment option). Crazy, you say? Let's look at two scenarios: (1) the stock price goes up; and (2) the stock price goes down.
If the stock price goes up, then the underwriters must deliver those oversold shares. Since the number of oversold shares equals the number of shares subject to the over-allotment option, all the underwriters do is exercise the over-allotment option and receive the shares from the option to cover the over-selling. Note that the underwriters don't make a killing by doing this. They over-sold the offering at the IPO price, and exercised the option at the IPO price, so there's no huge profits made here, (however, the underwriters do get their underwriting fees and commissions on these shares, so they do get an additional 15% commission).
If the stock price goes down, then it's a little more complicated. As mentioned above, the lead underwriter will support the stock at the IPO price, with a view to not let it "break" the IPO and fall below the IPO price. The lead underwriter accomplishes this by buying shares back from the market at the IPO price, which helps to stabilize the price and also removes shares from the market (reducing supply). Because the IPO was oversold, the lead underwriter can buy back these oversold shares at the IPO price with no impact to its balance sheet. But, once all of the oversold shares are bought back, then if the lead underwriter continues to stabilize and buy shares at the IPO price, its balance sheet is at risk. If there's a lot of downward pressure on the stock and the lead underwriter has already bought back all of the oversold shares, it will stop stabilizing and the stock price will fall and 'break" the IPO. This is what happened in the Facebook case.
Let's use an example. Let's say LattaCo goes public and sells 10 million shares in its IPO at $10 per share, raising $100 million. As part of the IPO, it grants its underwriters (Acme is the lead underwriter) a 30-day over-allotment option equal to 15% of the IPO shares (1.5 million shares) at the IPO price. LattaCo and Acme go on the IPO roadshow and Acme starts to build the IPO order book. While doing so, Acme actually sells 11.5 million shares to buyers at $10 per share.
Once the stock starts trading, the initial trade is $12 per share and the price keeps going steadily up from there, closing its first day of trading at $15 per share and closing at $20 per share a couple days later. A successful IPO. But Acme sold 11.5 million shares - how does it make good on those 1.5 million extra shares? This is where Acme exercises the over-allotment option to obtain those extra shares. It exercises the option, obtains the 1.5 million shares, delivers the shares, and everyone wins.
But what if the stock doesn't perform well. Let's assume LattaCo starts trading at $11 per share, but the price starts to drift down to the $10 IPO price. When the trades get to $10 per share, the lead underwriter Acme will begin to support the stock price by buying shares at $10 per share. Because the IPO was oversold by 1.5 million shares, Acme can buy back up to 1.5 million shares at $10 per share with no impact to its balance sheet. In this case, there's no longer any need to exercise the over-allotment option, and after 30 days it will expire.
More depth. The above is a simplified explanation of the mechanics of price stabilization and the use of the over-allotment option. We could discuss how the process is like a protected short; we could discuss how the over-allotment option can be from the company and selling shareholders; and we could also discuss the mechanics of how the underwriter actually oversells the IPO by 15% (essentially they borrow the shares from insiders). But why complicate things?
Facebook's stock closed at $31.00 today, down over 18% from its IPO price of $38.00 per share, and down 26% from the opening price of $42.05 on the first day of trading. Much has already been written about the IPO and what went wrong, but most articles have focused on narrow reasons. What follows is a more comprehensive analysis:
Pre-IPO Trading on Secondary Markets. Before its IPO, Facebook was very actively traded on private secondary markets, namely SecondMarket and SharesPost. What this means is that people who would have normally bought shares in the IPO or on the first day of trading didn't do so, which means lesser demand for the stock in the after-market. While this alone wouldn't account for the IPO performance, it could certainly have contributed.
Facebook Operating Performance. During the run-up to the roadshow, Facebook filed an amended registration statement indicating that revenue growth and ad sales growth had slowed. In addition, during the roadshow, General Motors announced that it was pulling its advertising from Facebook, which gave the company some bad press right before the IPO. Now it is being reported that certain analysts lowered their estimates for Facebook's future performance during the roadshow. What all this means is that the exuberance that would normally accompany a marquee IPO could have been dampened by the bad press surrounding these issues.
IPO Pricing. Facebook initially indicated an IPO pricing range of $28 to $35 per share, which was then raised to a range of $34 to $38 per share, and ultimately priced at the top of the amended range. This means there was strong demand at the lower range and enough to justify raising the range. But a couple of days before the IPO pricing, Facebook also increased the number of shares being offered by 25%. Some reports suggest that many retail accounts ended up with more shares than they wanted, and they may have moved to sell some of the excess shares on the first day of trading. All in all, the IPO was priced at the high end of the amended range, and expanded by 25%. This could have contributed to a feeling that the stock was fully priced and so may have minimized the upside. Still, the stock did open at $42.05 for an 11% pop, but then fell like a rock. The combination of the high IPO and that the extra supply of shares in the IPO may have contributed to the overall performance.
Nasdaq Glitches. Nasdaq had problems with their system that led to a delayed opening for Facebook and confusion surrounding trades. These problems could have caused concern on the part of traders, and concern and confusion certainly can't be good on the first day of trading.
Bad Press. During the entire IPO process, Facebook was hounded with articles about its valuation. All of this bad press could have muted the retail demand that normally would have purchased shares in the aftermarket.
Difficult Market and IPO Environment. On the days before Facebook's IPO, markets were having a difficult time. Nasdaq was falling and volatility (measured by VIX) was rising. Bad news about Europe's financial and economic crisis were all the headlines. It is difficult to take a company public with declining markets and rising volatility.
Conclusion. In my view, all of the above contributed to Facebook's stock price decline after its IPO. I will be curious to see where the stock price levels out and where the stock price is at the 6 month period. That's when the dust will have settled to a point when we can really evaluate the IPO.
Note: this post was updated on June 11, 2012. Here's the link:
A recent article on Calpensions.com entitled "Ballot-box Pension Reform Wins First Court Test" provides an interesting look at how several California cities are handling pension reform: through the ballot box. It's worth a read. Here's a link to the article:
Facebook had its first day as a public stock yesterday and ended the day with a market capitalization of $104.63 billion according to the Wall Street Journal and Yahoo! Finance (see below).
However, according to NASDAQ (where Facebook is listed), Facebook's market cap was $24.31 billion (see below).
But according to Bloomberg, Financial Times, Google Finance, and me, Facebook's market cap at the end of the day was $81.74 billion.
Why the discrepancies? First an anecdote. One of the painful learning experiences I had as a young investment banker was relying on a well-known data service for information and not checking the source documents. The lesson I learned is that data services can and do make mistakes. This is why you will see that I link to the source SEC filings in my posts. Always check the source data.
Now to answer the question. Market cap is simply the number of shares outstanding multiplied by the stock price. According to Facebook's final prospectus filed with the SEC (see below), there were 2,138,085,037 shares outstanding as of March 31, 2012. But from then until May 3, the company issued an additional 40,000 shares of Class A stock (read the fifth bullet point below the table carefully). This means there are 2,138,125,037 shares outstanding as of the IPO (assuming no stock was issued after May 3, which they'd have to disclose). With a closing price of $38.23, this gives a market cap of $81.74 billion. A screen shot of Facebook's final prospectus with these details is below.
So how did the Wall Street Journal and Yahoo! Finance get it wrong? They used the number of fully-diluted equity shares outstanding rather than regular outstanding shares. Fully-diluted equity shares outstanding assumes the exercise of all options and warrants, and gives a much bigger number (for an explanation of the difference between these, please see my earlier post on the difference between market cap and fully-diluted equity).
How did NASDAQ get a market cap of $24.31 billion? Beats me.
Update: As of 2:30 pm Pacific Time, Yahoo! Finance now has Facebook's market cap at $51.6 billion. Still wrong....
Link to Facebook's final prospectus: http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm
Link to my earlier post on market cap v. fully-diluted equity:
Facebook priced its initial public offering at $38 per share on Thursday night, and opened today at $42.05 for an opening "pop" of 10.7%. After that, the stock price peaked at $45 and quickly fell down to the IPO price of $38, suggesting that the underwriting syndicate began supporting the stock. Facebook's stock price was $38.23 at the close.
Here's a link to Facebook's final prospectus: http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm
Facebook has priced its initial public offering at $38 per share, for a total IPO size of $16 billion, or $18.4 billion if the over-allotment option is exercised. At the IPO price, Facebook has a market capitalization of $81 billion, or a fully-diluted equity valuation (which assumes exercise of options, etc.) of $104 billion. For the difference between market cap and fully-diluted equity valuation, please see my prior post of the topic. Facebook will begin trading tomorrow on NASDAQ with the ticker FB.
According to the Wall Street Journal, Facebook's IPO valuation of $104 billion is the highest ever for a US company at the time of its IPO, and is the second-largest IPO behind VISA Inc.'s 2008 IPO of $19.65 billion.
Venture capital investors in Facebook include Accel Partners, Andreessen Horowitz, Elevation Partners, Founders Fund, Greylock Partners, Kleiner Perkins Caufield & Byers, Meritech Capital Partners, Millennium Technology Value Partners and Technology Crossover Ventures.
Here's a link to the Wall Street Journal story: http://online.wsj.com/article/SB10001424052702303448404577409923406193162.html?
Here's a link to my prior post on market cap v. fully-diluted equity valuation:
Pinterest, the online pinboard site, has raised a $100 million round of financing at a $1.5 billion valuation, with all of the new money coming from Rakuten, Japan's leading ecommerce site. Existing venture capital investors Andreessen Horowitz, Bessemer Venture Partners, and FirstMark Capital, as well as several angel investors, also participated in the round. According to Rakuten's press release, the investment is also the start of a strategic partnership where Rakuten will help Pinterest expand to Japan and globally.
According to a Wall Street Journal article, Pinterest has passed 20 million users, up from 1 million users in July 2011. As of now, however, the site currently has little to no revenue.
Link to Rakuten's press release:
Link to the WSJ article:
As an update to my prior post, Facebook has filed an amended registration statement increasing the size of its initial public offering by nearly 25%. Facebook is offering the same number of shares in the IPO, and selling shareholders are increasing the number of shares they will sell. The total number of shares outstanding after the IPO will be the same, so there is no change to Facebook's valuation by this move.
Selling venture capital shareholders include Accel Partners (selling 49 million shares in the offering), DST Global Limited (selling almost 45.7 million shares), Greylock Partners (7.6 million), Meritech Capital Partners (7 million) and Elevation Partners (4.6 million).
In addition, the size of the over-allotment option has been increased by 15.5 million shares, all of which are offered by the selling shareholders. The over-allotment option (also known as the Green Shoe) enable the underwriters to manage the post-IPO market price of the company, with the goal that the after-market price doesn't fall below (or "break") the original IPO price. In most successful IPOs where the stock price rises meaningfully after the IPO and stays that way for several trading days, the over-allotment option is fully exercised.
Link to amended registration statement: http://www.sec.gov/Archives/edgar/data/1326801/000119312512235588/d287954ds1a.htm#toc287954_6
Reuters reports that Facebook may increase the size of its initial public offering by 25%, citing "a source familiar with the matter." If this is true, it comes on the heals of Facebook raising its IPO price range and indicates significant demand for the IPO. Facebook is expected to price its IPO after the market closes this Thursday and to begin trading on Friday.
Here's the link:
The Made In New York Digital Map is an impressive interactive map that shows the locations of digital media start-ups, incubators and investors in the city. I was impressed to see that the map included most of the venture capital investors in the area, and there several hundred companies identified as well as incubators. The map was created by the Mayor's Office of Media and Entertainment in partnership with Internet Week NY and New York Tech Meetup. Definitely worth checking out.
Here's the link: http://mappedinny.com/
Good article by The Wall Street Journal on the pace of acquisitions by new tech bellweathers Facebook, Zynga and Groupon. In "New Tech Spenders in Feeding Frenzy," the buying habits of tech companies are explored. According to the article, in the first three months of this year, Facebook, Zynga and Groupon have combined to make 21 acquisitions, over double the pace of their combined acquisitions during the same period last year. Many of the deals are moves to acquire technologies or enter new markets, as opposed to "aqui-hires" - acquisitions to acquire engineering or other talent. Here's a link to the article: http://online.wsj.com/article/SB10001424052702304543904577396691153835210.html
In a sign of strong demand for its initial public offering, Facebook filed an amended registration statement with the SEC increasing its IPO pricing range to between $34.00 and $38.00 per share. At the high end of the new range, this implies an IPO market capitalization of over $81 billion and a fully-diluted equity valuation of over $104 billion. The IPO is expected to price this week.
See my prior post on the difference between market cap and fully-diluted equity valuation.
Link to Facebook's amended registration statement: http://www.sec.gov/Archives/edgar/data/1326801/000119312512232582/d287954ds1a.htm
Link to my prior post on market capitalization v. fully-diluted equity valuation:
GigaOM reports that Facebook's acquisition of Instragram may take up to a year to clear regulatory hurdles. Apparently the Federal Trade Commission may be launching a probe into the acquisition, which would make Facebook a leader in photo sharing both on the internet and on mobile platforms. The FTC is concerned that Facebook would become the dominant advertiser on both these platforms, and hurt competition.
LegalZoom, an online legal services provider, has filed its S-1 registration statement with the SEC, indicating an initial public offering of up to $120 million. The company had $156 million in revenues in 2011, up 29% over 2010, and had $12 million in net income in 2011.
Morgan Stanley is the "left lead" underwriter, and is joined by BofA Merrill Lynch as joint book-running manager. Stifel Nicolaus, William Blair, RBC and Montgomery & Co. are co-managers of the offering. Venture Capital investors listed in the S-1 include Polaris Venture Partners, Institutional Venture Partners and Kleiner Perkins Caufield & Byers.
An interesting point is that the company has filed as an "emerging growth company" as defined under the new Jumpstart Our Business Startups (JOBS) Act that was recently enacted to make it easier for certain companies to go public. It also previously filed its registration statement with the SEC on a confidential basis, a new feature of the JOBS Act.
LegalZoom enables consumers and small businesses to obtain basic legal forms that are customized to suit their needs. The cost savings can be substantial. For example, a standard incorporation in California handled by a full-service law firm can run $2,500 or more; compare this to under $600 for similar services from LegalZoom. LegalZoom has consultants available to assist with the process, and attorneys are also available (for additional fee). LegalZoom also has an Educaton Center with good information on various legal topics.
As a former corporate attorney and venture capital fund investor, I will be interested to see how LegalZoom does in its IPO.
S-1 registration statement:
LegalZoom press release:
Links to prior posts on the JOBS Act:
Wall Street Examining JOBS Financing Ace:http://www.allenlatta.com/1/post/2012/4/wall-street-examining-jobs-financing-act-ny-times-dealbook.html
JOBS Act Jeopardizes Safety Net For Investors: Andrew Ross Sorkin
JOBS Fundraising Act to be Signed into Law on Thursday
The JOBS Act is Good, But SarbOx Shouldn't Get All the Blame:
Unintended Consequences of the JOBS Act:
Fundraising Bill Passes Senate:
The recent Forbes.com article "Fred Wilson and the Death of Venture Capital" provides Fred's thoughts on the industry. Fred is a managing partner at Union Square Ventures in New York. Fred's main concern? Too much money in venture capital. According to the article, there's $30 billion being invested in venture-backed companies each year, which dwarfs the $10 billion or so invested back in the 90's, when venture capital last provided great returns. The $30 billion a year also doesn't include the estimated $10 billion in angel investments, foreign capital, incubator programs, or crowdfunding (which will now certainly ramp up with the recently-adopted JOBS financing act.
I share Fred's concerns about too much capital flowing to Venture Capital. In 2000, at the peak of the internet bubble, roughly $86 billion was invested in venture-backed companies. No wonder this launched a decade of sub-par industry average performance. Clearly, $86 billion is too much. On the other hand, when less than $20 billion was being invested per year in the 1990's, performance was exceptional in an extraordinary period of time (strong economic growth, rising stock market, incredible technology innovation, healthy IPO market, etc.). The question is how much money can be invested annually in US venture capital-backed companies (from all sources - angels, venture capital funds, foreign money, corporate investors, incubators and crowdfunding) for the industry to provide meaningful returns. While certain venture firms seem to consistently provide strong returns over time, a glut of capital will impact all venture investors through higher entry valuations, competition for deals, and more wanna-be companies getting funded. In my opinion, the model can work with $30 billion per year invested in venture-backed companies, assuming venture capitalists are selective and diligent. However, if the amount invested in venture-backed companies grows to over $40 billion per year it will lead to depressed returns, in my view.
Two recent articles discussing China have caught my eye. The first is the VentureBeat article "As venture capitalists turn their backs on China, funding dries up." This article starts off by saying that "venture capital investment is hitting the skids in China..." and points to data indicating a steep decline in venture deals and investment in the first quarter of this year. Reasons for the decline are cited as the exit markets not functioning, a loss of belief in the China fast growth story, a slow-down of Chinese economic growth, reallocation of capital to US deals, and the impact of recent Chinese accounting scandals.
The second article is from the From the Crowd blog on Fortune Term Sheet entitled "VCs 'turn their backs' on China?" in which contributor Jeff Richards of GGV Ventures provides some of his thoughts on venture investing in China. He provides a balanced view of the risks of investing in China and the benefits of investing in China. His points are (1) good investors invest in both good and bad markets; (2) VCs must work harder now to find the best companies; (3) the Chinese domestic market opportunity is real and growing; and (4) the risks are real and remain, but real VCs will remain and the tourist investors will go home.
Links to the articles:
From the Crowd: http://finance.fortune.cnn.com/2012/05/09/vcs-turn-their-backs-on-china/
In the Business Insider article "How Goldman Sachs Blew The Facebook IPO," author Henry Blodget tells the tale of how Morgan Stanley became the coveted "left lead" banker and how Goldman Sachs was relegated to the third slot, behind JP Morgan. As a former banker, I found this article very interesting and it provides a good overview of how investment banks market to potential IPO clients. Here's the link: http://www.businessinsider.com/morgan-stanley-goldman-sachs-facebook-ipo-2012-5?op=1
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