Here we go again.
Traditionally, IPOs are a great deal for Wall Street and its prized clients, not so much for the companies the investment banks take public. Those fabled outfits advertise that if they price the shares for the underwriting low enough, so that the hedge and mutual funds and other financial institutions that subscribe get a big “pop” the first day of trading, the grateful buyers will repay the favor by staying loyal and holding for the long term, providing a steadfast ownership base going forward.
Whatever the real benefits of that arrangement may be to the issuer, it most often comes at an enormous cost. Though we haven’t seen many IPOs, and hence much underpricing recently, we’ve just witnessed an outstanding example of the phenomenon in action. It’s one for the ages, and specifically, this case’s stunning dimensions exemplify the craziness that typifies the surreal Age of Crypto.
On June 5, Circle Internet Group, issuer of the highly successful stablecoin USDC, debuted on the New York Stock Exchange (ticker: CRCL). In the days prior, the deal team led by JP Morgan, Citigroup and Goldman Sachs sold 34 million shares to institutional purchasers at $31 per share. The prospectus states that the IPO raised $996 million after underwriting fees of $59 million. Of that total, $434 million flowed into the company’s treasury, and the balance of $562.5 went to a group of large shareholders who sold at the offering, a group that includes co-founder and CEO Jeremy Allaire and several VC funds.
By 1:00 PM, Circle (CRCL) had jumped to $95, and then drifted downwards to close at $82.84, still posting a 167% gain for the day.
The rub: Circle could have piled more than twice as much into its coffers, and its insiders could have collected double the gain, if they’d gotten full price. It appears that the $31 per share amassed in the underwriting was nearly $52 less than what investors were willing to pay once its stock hit the open market. If Circle had pocketed the full $82.84 where its shares closed the day, it would have collected $1.2 billion after fees instead of $434 million. So the process led the crypto highflier to forego $766 million that it could have added to its cash horde. At the first day closing price, the execs, directors and funds, directors would have gotten $1.56 billion, or nearly $1 billion more than their proceeds from the IPO.
Hence, the amount “left on the table” tallies to roughly $1.76 billion.
In the annals of “amounts left on the table” from IPOs, that $1.76 billion looms big. Jay Ritter, a professor at the University of Florida and the world’s leading expert on IPOs, told Fortune that the figure ranks seventh largest for all offerings since 1980. The underwriting versus first day price shortfall is only exceeded by the instances of Visa, Airbnb, Snowflake, Rivian, DoorDash, and Coupang (the South Korean e-commerce platform that sacrificed just a tad more on its 2021 outing at $1.85 billion). The $1.72 billion that went to first day gains for the Wall Street favorites and not to Circle is almost exactly twice the $849 million in cash that, as the prospectus disclosed, the USDC purveyor held on its balance sheet prior to the offer.
Running the numbers on Circle stock
At the market close, Circle’s market cap sat at a towering $16.6 billion. That’s gives Circle a PE of 106 based on its net earnings of $157 million in 2024, making it according to Ritter “an incredibly expensive way to get exposure to cryptocurrencies.” He notes that Circle makes money by issuing USDC, on which it pays nothing to holders, and collects interest garnered by channeling the proceeds into what appear to be Treasuries and other “safe” fixed income securities that as of Q1, were yielding around 4.2%. To grow into its big multiple, Circle needs to mint huge new quantities of the stablecoin so that its spread income rises at a rapid rate. “It all depends if they can grow fast enough and get away without paying interest,” says Ritter. “For that to happen, stablecoins would have to become a preferred way for people to make transactions. What if their coin turns out to be incredibly lucrative, which is what needs to happen given that PE? In that case, a competitor could come in and pay interest,” and grab a big chunk of the stablecoin market from Circle.
Put simply, if competition rises and times get tough, Circle and its shareholders may sorely miss the extra almost $766 million that went to first day gains for the underwriters’ clients and not onto its balance sheet. That’s fives times its profits for last year. Considering the risks in the Circle business model that hinges on virtually creating a revolutionary new medium of exchange, losing that “rainy day” cushion, what now seems a minor sacrifice amid all the hoopla, may someday loom large.
