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Airbnb and DoorDash show the IPO market is going haywire

December 14, 2020, 3:04 PM UTC

The debate over the best way to take a company public has raged for decades in Silicon Valley, but it feels like we may be reaching a turning point.

The traditional IPO method relies on Wall Street bankers to divine an initial price and gather investors. An occasional twist uses a Dutch auction to set the price (as Google did). Then the direct listing method relies on bankers a lot less and the market a lot more (Spotify, Palantir). And lately we’ve seen a boom in the special purpose acquisition company merger, once considered a sketchy technique but now mainstream (DraftKings, Fisker).

Into the debate comes Airbnb and Doordash, a couple of recent initial public offerings using the traditional method that made headlines for the wrong reasons.

Doordash sold 33 million shares at $102, raising about $3.3 billion. But its shares opened for trading at $182. That extra $80 per share, in theory, would have added another $2.6 billion in the company’s coffers if its bankers had been more aggressive.

Airbnb sold 51.5 million shares at $68, raising $3.5 billion. But its bankers may have left even more than that on the table. Its shares opened at $146. The difference would have generated another $4 billion or more for Airbnb.

Some first-day “pop” is said to be desirable to keep investors coming back for future IPO deals. And bankers are humans, with all the imperfections that entails. Pushing the initial price too high may also scare away investors and cause excessive volatility. My former colleague and CNBC commentator Michael Santoli noted that IPOs for companies like Uber and Zillow traded below their initial price at first. “There’s no transcendent, enduring wisdom contained in the initial print,” he tweeted.

But even with all the asterisks and excuses and what not, something is clearly amiss when a company leaves a theoretical $4 billion on the table, enough to qualify as one of the 20 or so largest U.S. tech IPOs ever and more than Goldman Sachs, co-manager of the Airbnb deal, raised in its own mega-IPO 20 years ago.

Some people are also worried that we’re entering 1999-ish speculative bubble territory, including BlackRock CEO Larry Fink. “Is the market pricing in too large of a forward growth rate for these companies?” Fink asked rhetorically on Friday at a virtual tech event, and then answered: “There are going to be many accidents.”

Another shocking consequence: Roblox and Affirm are delaying their IPOs, pointing to the pricing issues with the DoorDash and Airbnb deals. “Based on everything we have learned to date, we feel there is an opportunity to improve our specific process for employees, shareholders and future investors both big and small,” Roblox CEO David Baszucki wrote to his employees explaining the delay, the Wall Street Journal reports. In all my years following IPOs, I can’t remember a time when deals were postponed because the market was too strong.

One simple solution may be to sell more shares. Airbnb sold 51.5 million shares but 70.4 million traded on the first day. Overall, the company’s fully diluted share count (including unexercised options and other contingent shares) is around 700 million, so it could have enlarged the deal pretty easily. When too many investors are clamoring for too few shares, the result is the giant share price jump, the bad look of money left on the table, and general unhappiness in the board room. Maybe even bigger deals are the solution.

Aaron Pressman
@ampressman
aaron.pressman@fortune.com

NEWSWORTHY

When you go after honey with a balloon, the great thing is to not let the bees know you’re coming. Russia's sweetly named but devastatingly effective hacking unit, Cozy Bear, penetrated the email systems of the U.S. Treasury and Commerce Departments and was also behind the recent attack on cybersecurity firm FireEye. No word yet on the scale of the damage, but the National Security Council met on Saturday to hear details of the attacks, Reuters reports. Hopefully there's no hacking connection to the widespread but sporadic Google outages on Monday morning.

No pay protest. Perhaps overly reliant on manufacturing in China, Apple has been expanding operations in India. But workers in southern India attacked an iPhone factory amid reports that Apple's contractor, Wistron, hadn't paid them in months. An Indian trade union rep pilloried "the brutal exploitation" of workers at the factory. Wistron blamed the violence on outside intruders and pledged to follow local labor laws.

You talkin' to me? Just how far off are fully self-driving cars? Amazon's Zoox unit says not too far, as it introduced an electric-powered robotaxi on Monday that has no steering wheel and seats four. But Zoox wasn't too specific about when it would introduce a commercial taxi service, only saying it would be after 2021 and starting in San Francisco, Las Vegas and other cities.

Foot stomping fury. In a move weighty with symbolism but with unclear economic impact, Oracle on Friday said it was shifting its headquarters from Silicon Valley to Austin, Texas. The database giant already had offices in both locales and isn't closing its Redwood City, Calif., outpost. Google isn't moving its HQ, but it is delaying the return of employees yet again. In an email Sunday night, CEO Sundar Pichai pushed back the return until September and said the company was considering implementing a flexible schedule with most people coming to work only three days a week.

Winning by a nose. In more concrete wheeling and dealing, video game giant Electronic Arts is buying racing game specialist Codemasters for $1.2 billion, snatching the company away from a rival bid from Take-Two Interactive. Private equity shop Vista Equity Partners is buying online education software developer Pluralsight for $3.5 billion including debt. And in a third billion-dollar deal, Vista rival Thomas Bravo is snapping up a controlling stake in security software firm Venafi at a valuation of $1.2 billion.

FOOD FOR THOUGHT

As Google, Apple, and other tech giants fight about controlling online ad-tracking technology, Rupert Goodwins has another idea. Goodwins, a columnist at The Register, proposes a law requiring that all online ads include a "never again" blocking button.

If a legally mandated ad-block technology was blessed with enough finesse to let the good ads through – and we're the only people who can make that judgement – then advertising revenue wouldn't fall to zero. Good advertising – the sort targeted at readerships by the reader's own actions – would prosper because the stuff that reaches only the right people is worth far more than the stuff that gets spaffed across all our screens. Platforms that could offer that targeting – we used to call them newspapers – would prosper too.

Bad advertising – the stuff that makes our lives hell and the ad-tech monsters rich – would suffer, but the crazification factor, that 35 per cent of people who seem certifiably and irretrievably permanent strangers to logic, would probably keep it going enough so the rest of us still enjoy some free stuff.

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BEFORE YOU GO

Even in a pandemic, Italian truffles remain an expensive delicacy. Fortune senior writer Bernard Warner, stationed in Rome, is such a truffle hound that he acquired a special dog just to hunt for the rare fungus treat. As I read his searching tale, I felt like I could almost hear music from Alessandro Cicognini or Ennio Morricone wafting in the background. The search didn't all go as planned, but there was a happy ending. Who could ask for more than that?