Why do stocks have to sell at one given opening price? I ask this honestly- I don't understand how public markets work in this respect.
What if instead, a giant silent auction occurred. All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left. This would maximize the income for the founders/investors and achieve a market rate that is fair and accurate.
Spotify is doing something like that (direct listing makes the stock be subject to the usual auction-like mechanism of the stock market from the moment it goes public).
> Spotify AB has filed confidentially with the Securities and Exchange Commission to go public via a direct listing, in which it won't sell shares in an initial public offering but will instead just one day declare that it is public and let anyone who wants to trade its shares.
The article also explains why Google's case was more akin to a traditional IPO than Spotify's.
The auction you mentioned would not be a good one. If bidders don't know that they will be protected by a single clearing price, they will drastically reduce their bids. It would basically guarantee that everyone who won the auction would be immediately under water. This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good.
Generally speaking, the highest single price that clears the entire demand is best, and would result in bidders submitting their most honest and aggressive bids.
The problem with IPO "auctions" is not that they're at one price, but that they aren't really auctions at all. It's just a private negotiation wrought with many conflicts of interest. Dropbox, for example, had 25x more demand to pay $21 a share than actually traded. And instead of raising the price further to clear the market at a fair valuation, banks instead used this archaic matching system to give shares at below-market valuation to themselves and their friends in hedge funds.
> It would basically guarantee that everyone who won the auction would be immediately under water.
That's why you'd use a second price auction, or similar structure - accept a list of buy offers (price + quantity of shares), sort by price, and then choose bids in order until you've raised all the money you want to. Charge all bidders the price of the lowest offer that you satisfied. I don't think there would be a 40% pop if they'd sold shares initially like that.
The reason people use this system is that it enriches the banks that recommend which system to use.
> This risk aversion leads to people bidding under their expected value of the stock, and instead results in them choosing a price that they're much more (e.g. 90%) confident will be good.
>
All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left.
An auction of this sort actually incentivizes the buyers to underbid their valuation, in the hope of getting a bargain. With a single good to be bought, the game theoretically correct way to run the auction is to award the good to the highest bidder, at the second highest bidder's price [0]. It's more complicated for an auction of stock, but closer to what they actually do.
Most buyers in your ‘fair auction’ would disagree, as they would pay more than others per share. Because of that, many potential buyers would wait to see what price the market finds reasonable. End result is increased risk for the company going public.
In this example, I guess the bank handling the IPO talked to potential investors and then set what it thinks was a reasonable price, taking into account that, typically, the company doing the IPO wants the positive PR of a rising stock price. It seems they underestimated, as 40% is very steep.
I think most people don't understand that if your prices shoot up so high that means your bankers underpriced it too much and their clients made a boatload and the company missed out.
You could argue that the existing shareholders, who own 90% of the stock are better served in the long run if the stock has positive momentum.
The calculation for if it's better to sell the other 90% into a hot market would be: 40% of 10% is only 4%. So if the initial pop has a long term positive impact of 4.4% on the price, then the existing shareholders come out ahead.
A sizable first day pop can be good for a number of reasons, not the least of which is publicity. 40% is obviously excessive, but there are reasons to leave a little money on the table.
Or it's possible that speculators are driving up the stock to an absurd valuation. Honestly, I trust investment bankers over the FOMO investors willing to pay $29 a share.
If you were a pre-IPO stockholder you would also be a post-IPO stockholder. Selling some of your shares in the IPO at $20 and the rest in a few months at $40 may better than selling a few at the IPO at $40 and the rest in a few months at $20.
If their intent is to cash out now, they are probably happy enough. Anyone with a long-term interest in the company would probably prefer for more of that valuation flow into the company's coffers, rather than to the underwriters and others with little long-term interest.
What are you talking about? The "bump" off of the fake price that got made up yesterday?
Dropbox was worth $12b yesterday, just like it is today. And a few banks suckered Drew into screwing himself, his investors and his employees by selling shares at a $8b valuation.
While Dropbox rose, Box shares fell 8% today even though their annual report released yesterday states YoY growth, delivering their first full year of positive free cash flow. They only mention Dropbox as a competitor "to a lesser extent"[1] in comparison to Microsoft and Google
For the bankers, yes. But Dropbox appears to have set the price wrong, and left a huge amount of money on the table for somebody else (the bankers) to take instead? Or does this 40% jump help Dropbox the company in some way I'm not understanding?
I don't think so. The same thing happened to SNAP where the stock immediate spiked after the IPO due to speculators. Now that a year has past since the IPO, it turns out that the IPO price was pretty reasonable.
That sounds right from the point of view of the whole economy, and is this stock priced correctly. But I think if I were Dropbox I'd rather have sold my stock at an even higher price, and if the IPO buyers take a loss on it I wouldn't think that's a problem. But, I am not experienced in such matters, perhaps I'm just missing something.
If the stock price bounces up and back down (but still closes higher after a year compared to IPO), no one is really upset. People chalk it up to hype.
If the stock price is lower after a year than IPO, you start feeling a lot of investor pressure. No one likes losing money and people take it as a sign that there are problems with your business.
I suspect that it's to avoid conflicts of interest. If Dropbox makes a lot of money from an overvalued IPO, it may look like market manipulation even if it's not.
Huh. Yeah I don't get it. If I sold my kitchen (saying it's 5% of my house) for $30,000 when I could have gotten $50,000, I suppose I wouldn't be broke up about it, but I'd still rather have %50,000.
They have a good product, no doubt - also interesting that "Box" stock has dropped some as of this hour.
However, to become the next giant, I would imagine they need to branch out and gain traction for tangential products. They've tried (dropbox paper) but not sure it has enough market share to make a dent just yet.
I really enjoy Dropbox Paper fwiw. I use it for just about all of my note-taking now, which the calendar integration makes even better.
Off the cuff, I can see a few things that they can expand to from where they are:
1. Give better central visibility into tasks/action items created in Paper docs without having to open them.
2. In my opinion, they should attempt to purchase Remember the Milk. It's an extremely polished to-do system that IMHO would be well served as a rebranded Dropbox Todos/Tasks product. If that were to happen, then it would also become the ideal destination for tasks created within Paper. The ability to share task lists would also align nicely with shared folders.
3. Get into the voip fax space by allowing users to sign up for a number, route the documents to specific folders or select an existing dropbox document and fax it to a number.
4. Get into the Docusign/Ecosign/Rightsignature space by allowing a user to select a document and send it to people for signing. They already have all of the tools they need to make this work in terms of sharing and view tracking. They've also got built in version control, so all that's really needed is the interface to designate complete-able fields and actually go through with the signing. It might make more sense to acquire one of those.
5. 3-4 could very easily create tasks in the task system, with direct document links and the ability to auto-complete them once the document was viewed or the task was completed.
6. This one might be a bit more of a long-term stretch, but if they completed those steps they'd have a system that combined document management and task tracking...and at that point they'd be very well positioned to break into the BPM game for small businesses. I've believed for a long time that a more accessible BPM solution could be big...and if you've addressed the passing docs around with tasks, then tracking completion and responses part you've got 90% of the human interaction side of a BPM system covered. Maybe even just direct integrate with Camunda?
Also they could take over handling county and government forms. So much email or fax that it hurts. Imagine you fill out a form, scan it and Dropbox it into the right folder (or form upload or even email the Dropbox link as a stepping stone).. basically replacing fax and email for secure document sending.
The pressure is now on to match that price with quarterly revenue/profit, should be interesting.
Too bad crystal balls are only a thing of fantasy, I remember seeing Google's post IPO stock price @ ~$81 and saying how absurdly over priced...oh well :)
Add losing $300mm to friends of Goldman, JP and DB by letting them screw Drew &co on their IPO pricing to the long list of ways Dropbox has found out how to lose money.
What if instead, a giant silent auction occurred. All potential buyers would submit how many stocks and the price they want to pay for them, then the submissions could be sorted from most to least expensive and sold at that submission price until there are no stocks left. This would maximize the income for the founders/investors and achieve a market rate that is fair and accurate.