Photo: Michael Seto
The stock of nouveau car-rental company ZipCar (ZIP) had a heck of an IPO debut this morning, popping 60%-70% above the IPO price.That means CNBC and other news sources get to write breathless stories like this one about how much money investors are making and how everyone’s partying like it’s 1999.
It also means ZipCar’s underwriters, Goldman Sachs and JP Morgan, just screwed the company and its shareholders to the tune of an astounding $50 million.
By wildly underpricing the deal and selling ZipCar’s stock to institutional clients way too cheaply.
ZipCar’s stock is trading at about $28 a share this morning. Goldman and JP Morgan sold the same stock to their best institutional clients at $18 a share last night. The value of ZipCar-the-company, it seems safe to say, has not appreciated by 50% in the past 12 hours. And that means that, on its underwriters’ advice, ZipCar sold its stock way too cheaply. It also means that the institutional investors who bought ZipCar’s stock last night are high-fiving each other this morning, celebrating their instantaneous 50% gain. (Lots of them are probably also dumping some stock).
Photo: Jon Miller
By underpricing the stock, Goldman and JP Morgan gave their best institutional clients a gift of at least $50 million this morning. And that money came right out of ZipCar’s pockets and the pockets of the Zipcar shareholders who sold on the deal.Here’s a simple analogy:
This is as if the trusted real-estate agent you hired to sell your house persuaded you to sell it to her best client for $1,000,000 by telling you this was the best price she could get. And then, the next morning, the person who bought your house immediately turned around and sold it for $1,500,000 (using the agent to sell it, naturally).
How would you feel if your agent did that?
And that’s EXACTLY what Goldman Sachs and JP Morgan just did to ZipCar and ZipCar’s shareholders.
It’s true that underwriters always try to modestly underprice deals, to the tune of a 10%-15% “IPO discount.” They do this to reward institutions for taking the risk of analysing and buying the stock of an unproven company. If there were no discount on IPOs, there would be little incentive for big investors to play ball before the offering: They’d just wait until the stock started trading and buy it then. This, in turn, would make it harder for companies to raise capital. So the modest discount, in which companies and underwriters reward investors with a good deal, makes sense.
(It’s also the reason that, in hot IPO markets, individual investors get furious about not being able to “play IPOs” the way institutions do. They see all the free money institutional investors are making, and they want some of it.)It’s also true that pricing IPOs is a craft, not a science: The underwriters pick the price based on the level of interest (and the prices) they get from their institutional clients. And they can get played like anyone else.
But there’s a huge difference between at 10%-15% IPO discount and a 50% discount, which is what ZipCar’s IPO just sold for. The institutions that bought the ZipCar stock last night are now 50% richer, just by virtue of being good clients of Goldman Sachs and JP Morgan. And that money came right out of the pockets of ZipCar and the ZipCar investors who sold on the deal.
Yes, ZipCar will get a lot of breathless headlines this morning. And, yes, most folks will think that ZipCar’s IPO was a roaring success. And the positive halo this “amazing IPO” will cast on the company will be worth something. It will also make it easier for ZipCar to raise more money in the future–because the investors in the last round did so well.
But having watched this game for two decades now (and played it for one of them), I don’t think there’s any way that this positive halo is worth a 50% IPO discount.
If ZipCar can sustain a price of $27 a share this morning, Goldman and Morgan should have sold it to institutions at $23-$24. Because the stock was instead sold at $18, ZipCar and ZipCar’s existing investors just got screwed by Goldman Sachs and Morgan Stanley to the tune of $50 million.
In other words, an IPO that ZipCar thinks cost a “7% IPO fee” on the $180 million the company raised (~$13 million) in fact cost the company about $63 million.
That is an outrageous price. And the windfall accrued to the huge institutional clients of Goldman Sachs and JP Morgan. And don’t think that Goldman or Morgan is going to let those clients forget it.
(And, by the way, those clients won’t forget it. Which is why they’ll never stop doing business with Goldman and JP Morgan, no matter how many examples of Goldman or Morgan “putting themselves ahead of their clients” the press and regulators dredge up. As this morning’s $50 million gift illustrated, it’s GREAT to be a big client of Goldman or Morgan, and the clients will always keep coming back for more.)
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