ZoomInfo’s public offering on June 4 won kudos as a bellwether for a stirring comeback in the beaten-down world of IPOs and a sign of the bull market in optimism that has ignited a historic rally in stocks. As usual, the business press measured the event’s success by the bounce in ZoomInfo’s price on the first day of trading, and by those standards, the IPO delivered big-time, bestowing a 62% gain. Business Day noted “the iconic first day pop.” The Wall Street Journal lauded “the strong debut.” Reuters wrote that ZoomInfo “struck a chord with investors,” and GeekWire cited “this blockbuster IPO.” ZoomInfo’s shares variously “soared,” “skyrocketed,” or just plain “rocketed,” depending on the headline of universally positive reviews that underscored the high spirits.
As a business, ZoomInfo won praise for good reason. Its cloud-based platform that generates leads for finding new customers is a big hit with its clients. The offering made billionaires of its visionary founders, Henry Schuck and Kirk Brown, and its $19-plus billion market cap as of June 9 attests to investors’ confidence in its prospects for achieving strong growth and profitability.
But measured by what an IPO should do—raise big money at the lowest possible cost to build the business and repay debt—the ZoomInfo debut, like so many other public offerings, rates as a flop. Not a single story this writer could find made the point, but the first-day leap shows that ZoomInfo allowed its underwriters to sell the shares to their institutional clients on the cheap, at far lower prices than those investors, and the general public, were willing to pay. The venture capitalists and founders that owned its shares as a private company raised $576 million less than if they’d sold at the market price established at the close of trading on June 4.
“The ZoomInfo case shows once again that the process of going public is extremely inefficient and expensive, and that it benefits hedge funds and underwriters at the expense of the pre-IPO shareholders,” says Jay Ritter, a finance professor at the University of Florida and the nation’s leading academic expert on the workings of IPOs.
It would seem hard to match the underpricing of ZoomInfo. But it just happened again. The latest and most extreme case of Wall Street lowballing is the public offering of Vroom. The underwriters sold 21.5 million shares in the used-car purveyor, mainly to money managers, at $22, raising $438 million after fees. During the maiden day of trading on June 9, Vroom zoomed 118%, closing at $47.90. Had Vroom managed to capture that full market price instead of the bargain that the banks secured for their big trading clients, it would have raised about $1 billion. The one-day gains that went to the funds instead of Vroom’s treasury: $562 million. It effectively cost Vroom $562 million to raise $438 million. That amounts to a charge of 118%, or $1.18 for every $1.00 it harvested in the IPO.
Bookending ZoomInfo’s offering during the first week in June were two other big IPOs, both generally hailed as successful because they followed the same pattern of hosting an opening-day surge. Warner Music’s underwriters presold its shares at $23; by the end of the first day of trading on June 3, the price stood at $30.12, a rise of 31%, meaning that Warner would have banked an additional $394 million at the market price. Shift4 Payments, seller of credit card terminals to retailers, launched the day after ZoomInfo on June 5. Its stock gained 46%, meaning that Shift4 sold at $159 million below what investors were bidding at the end of its opening day. All told, the three, back-to-back IPOs from the first week in June left a staggering $1.129 billion in forgone cash “on the table.” Add Vroom to the list, and the total reaches $1.7 billion.
The ZoomInfo offering was this year’s biggest tech IPO and ranks second to Warner Music in the amount raised. But because ZoomInfo’s stock was underpriced by twice as much, it sacrificed even more cash. ZoomInfo’s 17 underwriters, led by JPMorgan Chase and Morgan Stanley, presold 44.5 million shares, mainly to big money managers and hedge funds, at $21 a share, raising $887 million after $48 million in expenses. By the end of opening day June 4, those shares were worth $1.53 billion, so that ZoomInfo would have collected $1.463 billion after similar costs if the underwriters had sold the shares at what Wall Street was willing to pay. The difference of $576 million is what ZoomInfo left on the table, narrowly exceeding the gap for Vroom.
ZoomInfo’s big rise wasn’t an ephemeral spike. By the market close on June 9, its price had risen another 47% to 50.00, lifting its market cap to $19.5 billion. So the big investors who bought the shares at $21 a week ago are already sitting on 138% gains amounting to $1.37 billion.
It’s true that ZoomInfo sold under 12% of its total shares in the IPO. Hence, its market cap would be only 3% or so higher if it had collected that extra $576 million. That’s still a ton of money for a still relatively small, growing company (2019 sales: $335 million) that would benefit greatly from a big cushion of extra cash. In its offering statement filed on June 2, the company disclosed that after adding funds raised in the IPO, it will have $146 billion in cash on its balance sheet. Banking the $576 million it surrendered through underpricing could have raised its war chest fourfold. That half-a-billion-plus also represents 13 times its free cash flow over the past four quarters. The extra funds could have repaid almost 70% of its $833 million in long-term debt. (Through a spokesperson, ZoomInfo declined to comment for this story, citing restrictions imposed by the “quiet period” following the IPO.)
On his website, Ritter provides a list of approximately 300 companies that saw first-day run-ups in their shares over the past few decades, ranked by amounts left on the table. ZoomInfo is in 25th place, while Warner Music is 62nd. The practice of radically underpricing shares peaked, he says, during the dotcom bubble, and “isn’t nearly as extreme as in the past.” But the ZoomInfo, Warner, and Shift4 cases show that it’s still very much alive. The IPO game is extremely profitable for the underwriters and their clients, says Ritter. “The underwriters sell shares to hedge funds and mutual funds far below their market value so that they pop the first day. The clients reward the banks in ‘soft dollars,’ in the form of inflated commissions on trades that far exceed the cost of executing those trades.”
In exchange, he says, the young companies get special attention from sell-side analysts. The banks also contend that they’re selling to investors who will be loyal, long-term shareholders rather than flippers.
As Ritter points out, the promised analyst coverage doesn’t seem nearly worth the cost. And Wall Street allocates shares not to clients based on their devotion to the company but to those that pay the biggest commissions. The enduring mystery is how investment bankers manage, time and time again, to convince founders and venture capitalists to forgo the hundreds of millions, or even billions, when it’s so obvious that Wall Street is feasting at their expense.
It’s a cliche in IPO-land that the big pop generates great publicity for young companies making their debut on the public stage. Here’s a more sober view. It makes the leaders who agree to sell shares for far less than they’re worth look like they were taken for a ride.
