Speaking of Visa’s IPO…
I was reminded today of a series of lectures given by Professor Swaminathan when I was in Business School. In addition to just being a brilliant teacher of finance, he’s an expert in the field of corporate valuation, including the valuation of real options. I remember Swami explaining the concept of underpriced IPOs to us from his research. For you MBAs out there this won’t be a new thing but the rest of you might find this interesting.
Most IPOs leave money on the table. In other words, when a company goes public, it deliberately under prices what it think the market price will be. In Visa’s case today, since the market price ended up being $56.50 and not the $44.00 a share it was initially offered at, that translated into $5 Billion dollars Visa left on the table. Technically the shareholders as a whole lost out–since that is cash now not available to invest in positive NPV projects.
But you see the money wasn’t exactly left on the table. It was handed quite deliberately into the pockets of the firms below: (thanks to the Wall Street Journal for the information)
First, the original IPO Shareholders….okay, they deserve some compensation for all the “risk” involved in investing in the nation’s largest IPO–as you might know, Visa was owned and originally founded by the banks, so it’s not like they haven’t been getting returns from their investment in Visa along the way.
The largest owners of Visa ahead of the IPO were J.P. Morgan Chase & Co. (guess one could now say JP Morgan Bear Stearns Chase and company, or perhaps JP Morgan Bear Chase ;)) , Bank of America Corp., National City Corp., Citigroup Inc., U.S. Bancorp and Wells Fargo & Co.; all continue to own stakes in the company.
But wait, there’s more….don’t forget about those hungry investment banks. We know how underfed and overworked they are.
Given today’s current credit crunch and tightening of Wall Street bonuses, I’m sure more than a few folks were bailed out by the fees they raked in on this one. Per the WSJ: More than three dozen underwriters participated in Visa’s IPO. The deal was led by bankers from J.P. Morgan, Goldman Sachs Group Inc., Bank of America, Citigroup, HSBC Holdings PLC, Merrill Lynch & Co., UBS AG and Wachovia Corp.
It’s always bothered me that so many insiders benefit from IPOs in the way the average stockholder does not. Gotta give Google credit for keeping some of the food to themselves.
Perhaps even more frustrating, the popular press continues to perpetuate the myth of the “hot” IPO. Consider today’s article in Time. To quote:
Perhaps the biggest reason that Visa’s IPO price soared from $44 to $60 a share by noon on its first day of trading is simply that the company has massive growth potential, especially internationally.
Umm, no. Most of the smart money had seen the road show and had priced in their valuations the growth prospects. The fact is that most insiders know the real market number (or a close approximation) and they under price the shares accordingly to guarantee that juicy 30% pop the first day.
Nice work if you can get it. I’m reminded of a quote from Robert Sarnoff: Finance is the art of passing money from hand to hand until it finally disappears.