Receive free Lex updates
We’ll send you a myFT Daily Digest email rounding up the latest Lex news every morning.
Dear reader,
Small floats equal big price pops — just maybe not ones that will last. This week, two US tech companies joined markets and put an end to the deathly quiet in initial public offerings. Grocery delivery company Instacart raised $660mn. Klaviyo, a Boston-based marketing software company, raised $576mn.
Both priced their IPOs at the high end or above indicated price ranges. Both stocks rose in initial trading. But those gains were hard won. Neither priced their IPO above the last private valuation. Both made sure to pre-arrange investor interest and floated only a small percentage of shares. In Instacart’s case, less than 7 per cent. Yet even with all that effort, the stocks have started to give up initial big price gains.
A quick price check: Klaviyo listed at $30 and is now trading below $34. Instacart also priced at $30 and trades at $30.65. Neither has yet sunk to Arm’s level. The SoftBank-backed chip designer set the stage for the IPO revival last week when it made its Nasdaq debut. It too had a small float and priced at the high end of the indicated range. But by Thursday, Arm was trading below its IPO price.
Small floats make it easier for bankers to sell shares in newly listed companies. But they can also make share prices more volatile. Lex has higher hopes for Japan’s Kokusai Electric, which this week announced its plans to list. The local equity market is at a three-decade high and new listings are outperforming in the region. Plus the chip equipment maker will be valued at a discount to global peers. Financial engineering is no match for receptive markets.
For early venture capital investors such as Sequoia Capital, recent US market listings mean windfalls despite subsequent price falls. Later investors will be kept waiting. Private market valuations are unlikely to get a bump from the IPOs either.
What should investors do? Lex recommends they adjust their thinking and accept the fact that valuations are down and rates are unlikely to be lowered anytime soon. Time to start making deals. This week, Cisco Systems acquired cyber security software company Splunk for $28bn in cash. The deal makes sense for Cisco’s long-term plans. We think it is worth the premium being paid.
But focus on tech as a source of constantly rising spending at your peril. See how cost-cutting by tech groups this year has hurt Martin Sorrell’s advertising company S4 Capital.
Arm in arm
Lex was sceptical of the high valuations being bandied about for Arm from the start. We are equally nonplussed by SoftBank chief executive Masayoshi Son’s post-Arm IPO investment plans. An FT scoop found that he was considering investing billions of dollars in artificial intelligence start-up OpenAI. Lex notes Son’s poor record on AI. SoftBank sold out of Nvidia just before the stock price jumped. Now it wants to buy into an already highly valued company. He might do better in consumer tech, an area in which he has excelled.
AI is also a sector in which regulators are already starting to worry about competition. But then, regulator attempts to bear down on Big Tech have failed to land many blows. The US Department of Justice vs Google trial began last week — the biggest since Microsoft. When, Lex wonders, will private equity receive the same scrutiny? Consolidation in the sector is already under way. Might there be just 100 firms one day? Let’s hope not. We don’t think investors will be happy to send money to a small number of funds operating gigantic assets under management across multiple strategies.
We also took a look at the financial engineering under way in private equity this week. A slow M&A and IPO market has bred ingenuity including a growing market for “secondary” funds and “net asset value” lending. Props to private equity for the ideas, but it does not help with valuation assessments.
Crisis fund management
After the run on Silicon Valley Bank earlier this year, regulators declared that all deposit holders were guaranteed, not just those who had kept their accounts below the insured threshold. In Europe, subordinated debt investors were wiped out when UBS took over Credit Suisse, despite equity holders retaining some value.
Such decisions are intended to limit contagion. But their aftermath can change behaviour. Why, for example, would US deposit holders bother to stick to the Federal Deposit Insurance Corporation limits now? And why would investors be interested in the new additional tier 1 bonds that UBS hopes to sell?
Of course, UBS is not the same bank as Credit Suisse. The same risk factors do not apply. Still, memories of how investors were treated in the past crisis will linger. Lex thinks this will lead UBS to pay a premium.
Best(ish) of British
UK prime minister Rishi Sunak’s net zero target tinkering met widespread disapproval this week, including within his own party. Lex points out that messing around with dates will put off investors in the sectors trying to hit them. This includes heat pump manufacturers. There was some dissent among Lex readers on the impact of Sunak’s planned changes. We love strong opinions (but less of the death wishes if you please).
Let’s see if we can find some more positive news from home. Lex cannot go as far as London Stock Exchange Group chief executive David Schwimmer, who claimed this week that any criticism of the City’s eminence was mere clickbait. That’s hard to argue when companies keep swerving London listings. But some London-listed stocks came through.
OK, most of Pearson’s business now comes from the US. But Lex sees scope for advancement for new chief executive Omar Abbosh. Elsewhere, we noted the unexpected rebound in retail parks, now being used as online delivery hubs, and spending upticks at high street retailers Next and JD Sports. That seems a happy note on which to end.
Other stuff I’ve enjoyed
Of all the mad projections being made about AI, the idea that it might be able to help us speak to animals is one of my favourites. The FT’s Tech Tonic podcast produced a short series on the idea this week while this New Yorker article asks whether we might start by translating whale clicks.
There have been a lot of reviews of Walter Isaacson’s Elon Musk biography. Alphaville’s Bryce Elder has written the most enjoyable one so far.
Enjoy your weekend,
Elaine Moore
Deputy head of Lex
Read the full article here