Finally, Wall Street bankers have done well by a hot IPO client.In recent months, as companies like LinkedIn and Zipcar have gone public with huge “pops”–instant price increases in which shares trade at 50%-100% above where they’d been sold to institutional clients hours before–we have lambasted Wall Street banks for doing such a piss-poor job.
In LinkedIn’s case, for example, we calculated that Morgan Stanley & Co. had screwed the company and its selling shareholders out of at least $200 million by so grossly underpricing the deal that the stock traded at more than double the offering price within minutes after it opened.
(LinkedIn was priced at $45 and traded between $80 and $120 for more than a week after the deal. We figured the IPO should have been priced at $60, not $45.)
But today, Morgan Stanley has redeemed itself–by pricing the Pandora IPO almost perfectly.
Over the past couple of weeks, as the Pandora IPO marketing process unfolded, Morgan Stanley raised the expected pricing range from $7-$9 to $10-$12. Then, last night, after the marketing period ended, Morgan priced the shares well above the latest range, at $16. This morning, Pandora’s stock opened around $20, briefly traded higher, and then settled in around $18-$19.
This means that, finally, Wall Street has rewarded its investor clients for buying a risky tech IPO without ripping off its corporate clients in the process. (By balancing their competing interests fairly.)
Contrary to what you often hear in the press, IPO pops are terrible for companies. They take cash that rightfully belongs to the company and then “gift” it to institutional investors in the form of an instant overnight “pop.” They make the IPO vastly more expensive than it appears to be.
Yes, the press may write stories ogling the pop and oohing and aahing about the “tremendous demand” for the stock, but the “demand” is reflected in the trading price, not the pop. The pop is merely a function of how badly the IPO was underpriced (bigger pop = worse underpricing).
IPO buyers do need to get some discount, on average, as a reward for taking the risk of buying new stocks before they open.
But an appropriate reward is the 10%-15% IPO discount that underwriters have traditionally aimed for. Not the 50%-100% (or more) that came into vogue during the tech bubble.
So what happens if Pandora’s stock now slips below the IPO price?
Yes, ideally, Pandora will remain above the IPO price for a while. This will continue to reward investors who took a chance on it and still hold it–and they will be encouraged to step up to the plate and buy another IPO in the future. It will also encourage investors who are allocated IPO stock to hold onto it instead of blowing out their positions when the stock opens. This goes a long way toward helping the company build a “strong-handed” shareholder base.
But even if Pandora’s stock “breaks” the IPO price and then never trades above the IPO price again, the underwriters will have done the right thing by pricing it at $16 last night and having it trade to $18-$25 today. Already, enough Pandora stock has changed hands that every share that was bought on the IPO could have been sold at a better price today, so there’s no reason to feel sorry for anyone who loses money from here on in.
If Pandora’s stock drops below the IPO price and never trades above it again, this will mean, in part, that investors were willing to pay too much for it. They’ll learn their lesson quickly. And they’ll be more careful next time.
(It may also mean that market conditions may have suddenly changed radically, as they often do. Underwriters shouldn’t be held responsible for changed market conditions, just as real-estate agents shouldn’t be held responsible if house prices crash or soar after you buy or sell. Your agent’s job is to get you a fair price at the time, not to ensure that you make money forever. How could he or she possibly do that?)
By pricing the Pandora IPO well, Morgan Stanley balanced the competing interests of its corporate and investor clients, and it did well by both of them.
The firm deserves to be applauded for this. And future IPO clients should take note.
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