Hope isn't really much of a strategy-- unless you are an investment banker. I hear a lot of cheap conversation and a fair amount of wishful thinking about this year's expected abundant crop of initial public offerings, but-- at least to date--there's not much to show for all the talk. I'm sure we'll see a few brand-name, bloated valuation deals come thru the pipeline --although Q1 is already in the books with little or nothing other than Snap to arguably brag about. Then again it's a little tough to brag on an IPO that was recently trading 3 or 4 bucks below its opening price. You can expect to see some aggressively manipulated and short-term upward bumps in the opening sessions for some of these "winners," but overall, it's gonna be another very slow and painful season for IPOs regardless of how much hype the Street and the financial media try to manufacture. Why?

There are three pretty clear reasons. (1) For real companies, there's no reason to IPO. A good, solid and growing company doesn't need or want the help, the heartaches, or the hurrahs of being public. They'd rather continue to focus on building their business; (2) For unreal companies-- the bogus unicorns-- there's no upside. These outfits have been largely hoisted on their own financial petards and now they can't figure out a way to get their deals out the door and sell their story to the public suckers without the embarrassment of a downward valuation when the underwriters actually start writing the deal book; and (3) They're already a dead dog, living on borrowed time. These are companies that are trying to prop up a tired tale that should never see the light of day. But that won't prevent greed-crazed brokers and bankers from reacting to that old Wall Street maxim: "when the ducks are quacking, you better find something to feed them" (or your competition surely will). So they're pretty much willing to try to sell anything they can get on file with a semblance of a straight face. Anything to make a buck.

You'd think that most of us had learned our lessons, at least in the case of the dog deals, but there's really no evidence to support that. My Dad used to say that, if you were offered an oil and gas deal in New Jersey or a share of a thoroughbred in Toledo, you should flee as fast as you can. If these things couldn't get done in Texas, Tennessee or Oklahoma, they weren't worth doing and it wasn't a question of "if" you'd lose your money, it was just a matter of "when." To me, that's what the market looks like today. When I hear some of the folks talking about the IPO "window" being open for business, and I look at the junk that people are promoting, the only window I'm reminded of is in the Beatles song She Came in Through the Bathroom Window and the lyric: "Didn't anybody tell her? Didn't anybody see?" Apparently not.

As far as the Unicorns go, there's an internal set of obstacles and some market issues as well. Internally, they have been hyping and promoting these crazy valuations and then using them for follow-on fundraising. And now they have to justify these nutty numbers to some third parties. Even as shameless and short-sighted as most brokers and underwriters are, they're finding that the numbers just won't stand up and they're having to go back to their investors and talk about "public" valuations that may be less than the last couple of rounds of capital injections. Cloudera just set terms for its IPO estimating an initial market cap at less than half its last private valuation, $4.1 billion, in 2014, when Intel poured more than $750 million into the company. No silver lining in this cloud. These aren't easy conversations, but the saving grace may be that everyone in the pool at that point is part of the same bullshit bandwagon and no one really wants to mention the Emperor's lack of apparel. In some ways, this would be like having Ronald McDonald criticize your taste in clothes.

The second, bigger problem is that the ongoing private valuation inflations have so jacked up the numbers that there's really little or no bump left for the public even if the sellers can get the offering out the door. This is why Snap is already flatlining. Where can you really go when you've already sucked all the sex and juice out of the story? This has pretty much been the case since the LinkedIn offering in 2011, but it has reached insane levels now, where the comparisons between the private value return multiples that have been created and the public value return multiples are downright disgusting. Take a look at any of LinkedIn, Yelp, Facebook or Twitter and you can see the tiny fractions of the overall value that ever accrue to the public investors. There's probably no clearer demonstration of how and why we're constantly hearing about increasing and massive levels of wealth concentration in this country. We knew it was happening, but we probably didn't realize that we were some of the most active enablers.

But the most interesting discussions relate to the reasons that the good companies with great prospects don't want to go public, don't need to go public, and, most likely, shouldn't go public. There are at least half a dozen clear concerns that the management teams of these businesses consistently allude to in detailing their reluctance to do an IPO:

(1) We don't need the money. Cash isn't an issue and we don't need public paper to do acquisitions.

(2) We don't want to incur the substantial costs-- both of getting public and being public in terms of compliance, filings, etc.-- and we don't need the management distractions.

(3) We don't need the additional media scrutiny and the multi-agency regulation that being a public company brings.

(4) We're not excited about the mandatory disclosures that simply serve to assist and inform our competitors and other copycats and fast followers about our activities, results and plans.

(5) We think M & A is a better exit in many cases ("building to be bought") and a lot more manageable and controllable than the vagaries of the public markets. It's always better to be bought than sold.

(6) We don't want to be the next whipping boy for POTUS.

Bottom line: an IPO is no longer the brass ring for anyone with a brain and a real business-- it's more likely to be a bunch of sad sacks and oversold salesman walking around with tin cups.

 

Published on: Apr 18, 2017