New process, same result.
A new hybrid auction process used for the
initial public offering was designed to give the company and underwriters led by Goldman Sachs a better read of investor demand than the traditional IPO procedure and allow for pricing closer to market.
But judging from the 86% gain in DoorDash stock (ticker: DASH) on its first day of trading Wednesday, the hybrid auction process didn’t accomplish that goal.
The offering of 33 million shares was priced at $102, above the pricing range of $90 to $95, and then soared to close Wednesday at $189.51, valuing DoorDash at about $72 billion based on a fully diluted share count.
It appears that DoorDash got what it desired—a more detailed list of what big investors were willing to pay for its stock—and still chose to price it cheaply relative to demand. DoorDash apparently wanted to direct stock to certain favored investors who weren’t the highest bidders.
The guiding principle here seems to be that some institutional investors are better than others, with favored ones supposedly more supportive of the company and more inclined to hold stock for an extended period rather than flipping it on the first day of trading. DoorDash declined to comment.
The hybrid auction process is just that. Companies, aided by their IPO underwriters, get a read on demand and then choose to price the deal where they want and allocate stock to whom they choose. That is why the process has been described as “bid like an auction, allocate like a traditional IPO.”
DoorDash was unwilling to do a full Dutch auction in which it would have committed to allocate stock only to the highest bidders as
(GOOGL) did with its 2004 IPO.
There could be a similar pop in
when it starts trading Thursday. It has priced its $3.5 billion IPO of 51.5 million shares at $68, 13% above the top of the pricing range of $60 a share. This values Airbnb at about $47 billion based on a fully diluted share count. Airbnb will trade on the Nasdaq under the ticker ABNB.
The Airbnb IPO is using the hybrid auction originally employed by the
(U) IPO in September. It is being underwritten by a group led by Morgan Stanley.
If Airbnb has anything like a DoorDash-type first-day gain, it could trade Thursday above $100 a share.
Some of the big gain in DoorDash stock Wednesday also reflects the frothy market for IPOs, particularly those in hot technology and consumer sectors.
And the deal wasn’t priced cheaply based on DoorDash’s financial results given that it operated at loss — $149 million—in the first nine months of 2020.
The IPO price of $102 valued DoorDash at more than 10 times projected 2020 sales, in line with the most richly valued global comparable company,
(MPNGF) of China. DoorDash is much more expensive based on sales than its smaller U.S. rival
(GRUB), which is valued at four times 2020 sales. (Grubhub has agreed to be acquired by Amsterdam-based
Just Eat Takeaway.com
(TKAYY) in an all-stock deal valued in June $7.3 billion.)
One takeaway from the DoorDash deal is that big, favored institutional investors know that they don’t have to bid aggressively and still get allocated stock.
IPO critics like venture capitalist Bill Gurley of Benchmark have blasted Wall Street, writing earlier this year that the process is “robbing Silicon Valley founders, employees, and investors of billions of dollars each year.”
But overlooked is that Silicon Valley companies don’t appear to want to maximize IPO proceeds and would rather dole out stock to favored investors. If they did want to get the most money in their public debuts, they would commit to a true auction process.
The fault with the IPO process may lie with Silicon Valley and not Wall Street, which merely does what the client wants.
Write to Andrew Bary at firstname.lastname@example.org