Investors see Snap's IPO
as 'too big to fail'
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[March 03, 2017]
By Lauren Hirsch, Heather Somerville and Liana B. Baker
YORK/SAN FRANCISCO (Reuters) - Institutional investors anxious not to be
left out of this year's marquee initial public offering helped Snap Inc
pull off the biggest U.S.-listed technology share sale this week since
Chinese e-commerce juggernaut Alibaba Group Holding Inc smashed records
Keen to boost returns and with a dearth of new stocks to buy, the IPO of
a buzzy social media group was a "must-have" for money managers despite
concerns about the company's strategy, slowing user growth and lack of
voting rights for new investors, sources familiar with the offer said.
"Taking a piece of the company is almost a foregone conclusion," said
Evan Pondel, president of investor relations firm PondelWilkinson Inc.
Investors' ardor for Snap shares - which rose almost 50 percent in its
market debut on Thursday, giving it a market value of nearly $30 billion
- bodes well for future tech IPOs.
Although blockbuster names such as Uber Technologies Inc [UBER.UL] and
Airbnb Inc are not expected to go public this year, there is a lineup of
smaller technology companies preparing to list in the coming months that
could benefit from residual investor enthusiasm, technology investors
To ensure a successful market launch, Snap's bankers deployed a common
tactic on big tech IPOs: they limited supply. Snap offered only 15
percent of the company to investors, including retail investors and
short-term hedge funds, sources familiar with the IPO strategy told
Reuters, speaking on condition of anonymity as the process is private.
"All this concern about the number of users slowing down - a tech IPO of
this sort has nothing to do with the business, nothing," said Philippe
Collard, founding partner at Yabusame Partners, which advises technology
startups. "It has everything to do with a financial transaction where
you create artificial demand.”
Hedge funds are famous for buying into an IPO only to sell shortly
after, but institutional investors are not above quickly "flipping" a
stock if they see an opportunity.
However, a quarter of the new offer was subject to a one-year lockup, an
unusual stipulation, limiting the amount of churn.
Large actively managed mutual funds are among the most sought-after IPO
investors because of their size and their tendency to hold stocks for
longer. They develop strong ties to IPO underwriters by virtue of being
prolific IPO investors and providing the banks' brokerage business with
These funds are also under pressure to boost performance as investors
redirect tens of billions of dollars each month into index-tracking
funds, which cost less and over time have performed better.
Fidelity Investments, BlackRock, T. Rowe Price and Wellington Management
began piling into pre-IPO tech companies in 2014, and both Fidelity and
T. Rowe Price invested in Snap during a private funding round last year,
positioning them to benefit from Thursday's pop.
Fidelity and T. Rowe Price declined to comment on whether they had
bought into the IPO this week.
[to top of second column]
A woman stands in front of the logo of Snap Inc. on the floor of the
New York Stock Exchange (NYSE) while waiting for Snap Inc. to post
their IPO, in New York City, NY, U.S. March 2, 2017. REUTERS/Lucas
was significant pent-up demand for a new internet stock. Snap, the parent group
of popular disappearing-messaging app Snapchat, went public after a long dry
patch in the technology IPO market, with 2016 the slowest year for such launches
In addition to the absence of new shares, acquisitions and buy-backs have zapped
investors in public technology companies of places to park their cash.
Technology mergers and acquisitions and buybacks outpaced technology IPOs last
year by a ratio of 38 to 1, according to Thomson Reuters data.
BEHIND CLOSED DOORS
In its IPO roadshow in New York, San Francisco, London and elsewhere, Snap Chief
Executive Evan Spiegel brushed aside concerns of slowing user growth and
stressed Snap's potential to change "the way people live and communicate,"
according to sources who attended.
Even though many funds felt compelled to invest in Snap, they still had
questions for the company. But they asked the toughest ones - about the
company's corporate governance and slowing user growth - behind closed doors, in
small meetings between management and the underwriters' preferred clients,
sources close to the situation said, asking not to be named because the process
dynamic is typical of such a high-profile IPO, when a full order book is all but
Those investors invited only to the roadshow lunches and keen for a decent
allocation are more interested in impressing the IPO bankers – who take notes on
who attends – with how closely they have read up on the company, and do not want
to jeopardize their chances by rattling the company management, said investor
relations experts, bankers and lawyers.
"It's like going to do the college visit. When it's time to decide who to admit,
you look to see who put in the effort," said Lise Buyer, a principal with the
IPO advisory firm Class V Group.
On the roadshow, Snap largely deferred questions about its user growth in public
sessions. In New York, not a single question was asked about the company's
first-of-its kind share structure that offers IPO investors no voting rights.
"It’s an exercise in diplomacy," Pondel said. "You can't be too chest-pounding,
because that’s not someone they may want to have a piece of the company."
(Reporting by Lauren Hirsch in New York and Heather Somerville and Liana B.
Baker in San Francisco; Additional reporting by Ross Kerber in Boston; Editing
by Carmel Crimmins and Bill Rigby)
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