tag:theconversation.com,2011:/global/topics/ipos-367/articlesIPOs – The Conversation2022-10-27T12:28:35Ztag:theconversation.com,2011:article/1927992022-10-27T12:28:35Z2022-10-27T12:28:35ZElon Musk takes Twitter private – here’s what that means for the company and its chances of success<figure><img src="https://images.theconversation.com/files/491994/original/file-20221026-19-1q1c4p.jpg?ixlib=rb-1.1.0&rect=40%2C62%2C2955%2C1931&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Elon Musk has said he intends to complete his purchase of Twitter after earlier trying to wriggle out of the deal. </span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/VaticanMusk/2f4d17cc351b4e52aa8558ae7304a946/photo?Query=elon%20musk&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=1321&currentItemNo=62">Patrick Pleul/Pool via AP</a></span></figcaption></figure><p>Elon Musk <a href="https://www.bloomberg.com/news/articles/2022-10-28/musk-completes-44-billion-twitter-deal-ending-months-of-enmity?srnd=premium&sref=Hjm5biAW">has finally completed</a> his US$44 billion deal to acquire Twitter and take it private. </p>
<p>The <a href="https://www.bloomberg.com/billionaires/">world’s richest man</a> has already begun putting his imprint on the social network by <a href="https://www.wsj.com/articles/elon-musk-completes-twitter-takeover-11666918031?mod=hp_lead_pos1">firing four of its top executives</a>.</p>
<p>While most people are likely familiar with the idea of <a href="https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/">taking a private company public</a> – the process that allows individuals to buy and sell a company’s shares in the stock market – the reverse process is not as well understood and <a href="https://corpgov.law.harvard.edu/2022/08/14/should-your-company-go-private/">happens far less often</a>. </p>
<p>As a <a href="https://michiganross.umich.edu/faculty-research/faculty/erik-gordon">business and law professor</a>, I have been analyzing mergers, privatizations and other corporate deals for over two decades. The most common question I have been getting from students and faculty colleagues is why would Musk want to take Twitter private? Or more simply, what does it mean to go private? </p>
<p>The answers to these question help address a more interesting one: Will he succeed? </p>
<h2>Public vs. private</h2>
<p>Let’s start with the basic differences between a public and private company.</p>
<p>For starters, a <a href="https://www.cooleygo.com/glossary/public-company">public company is widely held</a>, meaning it has a lot of shareholders. Anyone can buy shares of most public companies, their shares trade on stock exchanges, and their market price is widely available on websites and apps. </p>
<p><a href="https://www.sec.gov/education/smallbusiness/goingpublic/exchangeactreporting">Federal securities law requires</a> public companies to disclose a lot of information about their operations and financial condition in <a href="https://www.sec.gov/files/form10-k.pdf">reports that are posted on the Security and Exchange Commission website</a>. Basically, anything that happens to a public company that’s of consequence to investors must be disclosed publicly. </p>
<p>A private company, on the other hand, <a href="https://corporatefinanceinstitute.com/resources/knowledge/finance/private-company/">is closely held</a>. It has few shareholders – sometimes just one. It usually is impossible to buy shares of a private company. When it is possible, it is difficult because shares don’t trade on exchanges. You have to find someone who is willing and able under restrictive securities laws to sell you their shares.</p>
<p>In addition, a private company is not required to file disclosures or anything else with the SEC.</p>
<p>Another key difference is the power the chief executive has. While public company CEOs have a lot of power, that power is constrained by things like a board of directors and rules on compensation. </p>
<p>Private companies have no meddlesome boards or rules governing compensation or other issues. And with few or no pesky outside shareholders, leaders of private companies don’t have to worry about the effect their decisions might have on the share price. </p>
<h2>Going private</h2>
<p>Many, if not most, companies begin their lives as a private company – perhaps in a family garage, as <a href="https://www.businessinsider.com/google-apple-hp-microsoft-amazon-started-in-garages-photos-2019-12">seems to be the case in so many startup origin stories</a>. </p>
<p>As a young company grows, <a href="https://www.forbes.com/advisor/investing/initial-public-offering-ipo">it needs more funding</a>, a problem often solved by doing an initial public offering that pulls in a lot of cash and opens up ownership to anyone. </p>
<p><a href="https://www.investor.gov/introduction-investing/investing-basics/glossary/going-private">Taking a company private</a>, as Musk did, reverses the IPO. The Tesla billionaire paid Twitter shareholders $54.20 a share, which is a 64% premium over the price Twitter stock was trading at a few weeks before Musk’s offer was disclosed on April 14, 2022.</p>
<figure class="align-center ">
<img alt="A white man in a suit sits in front of an old computer in a dorm room, as two others in street clothes stand in the door opening" src="https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491992/original/file-20221026-6305-el39uc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Michael Dell, pictured wearing a suit in 1999 in the dorm where he started his eponymous computer company, took it private in 2013, later taking it public again for a huge profit.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/RiseandFall/cf82774133a94ecabd3db2427cb2673c/photo?Query=Michael%20dell%20computer&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=28&currentItemNo=9">AP Photo/Harry Cabluck</a></span>
</figcaption>
</figure>
<h2>A success story</h2>
<p>So why would Musk or anyone want to take a company private? One key reason is control, which allows a buyer to impose his or her vision and singular strategy. </p>
<p>Now the shares have changed hands, Twitter is Musk’s to do with as he pleases – from reopening the accounts of <a href="https://www.cnbc.com/2022/05/10/elon-musk-says-he-would-lift-twitter-ban-on-donald-trump-after-deal-closes.html">former President Donald Trump</a> and Ye, <a href="https://techcrunch.com/2022/10/09/kanye-west-twitter-elon-musk">the artist formally known as Kanye West</a>, to <a href="https://techcrunch.com/2022/10/20/elon-musk-twitter-layoffs-wapo/">slashing the workforce</a> and firing executives.</p>
<p>That’s why Michael Dell decided to take the computer <a href="https://www.reuters.com/article/us-dell-buyout/dell-to-go-private-in-landmark-24-4-billion-deal-idUSBRE9140NF20130206">company that bears his name private in 2013</a>. </p>
<p>At the time, the <a href="https://www.investopedia.com/articles/markets/110915/dell-stock-doesnt-exist-here-why.asp">company was struggling</a> as personal computer sales slumped amid the rise of the smartphone. As <a href="https://www.sec.gov/Archives/edgar/data/826083/000119312513266621/d558010ddfan14a.htm">he explained in a securities filing</a>, Dell believed it was essential to quickly transform the company from primarily a PC maker to one focused on providing large organizations with entire information technology systems and managing them. </p>
<p>He said he couldn’t make the transformation as a public company because it would hurt short-term profits, which would likely cause the share price to fall. That in turn could harm consumers’ perception of Dell and lead to employee turnover.</p>
<p>In other words, Dell’s plan was perhaps too bold for a public company. But the strategy paid off – for him, his fellow investors and his company. </p>
<p>Dell himself <a href="https://www.forbes.com/sites/connieguglielmo/2013/10/30/you-wont-have-michael-dell-to-kick-around-anymore/">chipped in $750 million in cash</a> and over $3 billion in the form of his 16% stake in the company, with about $3.4 billion coming from other investors and $16 billion in debt.</p>
<p>By 2018, when the company went public for the second time, Dell’s <a href="https://www.ft.com/content/73ab2020-906c-11e8-b639-7680cedcc421">stake was worth $32 billion</a>, with similar large payouts for his co-investors. The <a href="https://www.statista.com/statistics/264911/dells-net-revenue-since-1996/">company thrived as well</a>, with sales and profits soaring after a period of low growth, as Dell predicted. Workforces often fall when a company goes private, but <a href="https://www.statista.com/statistics/264917/number-of-employees-at-dell-since-1996">Dell’s was up about 50%</a> in 2020 compared with 2013.</p>
<figure class="align-center ">
<img alt="a person in a coat walks past the front of a store with a Toys r Us sign over glass doors and signs reading clearance sale" src="https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491993/original/file-20221026-23824-5gbu7p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Toys R Us went bankrupt in 2017.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/ToysRUsNewStake/fd082ebecdc643b78ff837b1e51bfd4a/photo?Query=toys%20r%20us&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=684&currentItemNo=17">AP Photo/Julio Cortez</a></span>
</figcaption>
</figure>
<h2>A classic fail</h2>
<p>But it doesn’t always end well. </p>
<p>In the early 2000s, Toys R Us <a href="https://www.latimes.com/business/la-fi-toys-r-us-leveraged-buyout-20180316-story.html">was in serious trouble</a>. Although e-commerce was still in its infancy, it was beginning to disrupt brick-and-mortar retailers, <a href="https://www.nytimes.com/2018/03/15/business/toys-r-us-bankruptcy.html">increasing competition</a> – especially in the market for children’s toys. A <a href="https://www.wsj.com/articles/SB113798030922653260">plan to sell its wares online via Amazon fizzled</a>, leaving Toys R Us way behind in e-commerce. Meanwhile, <a href="https://knowledge.wharton.upenn.edu/article/the-demise-of-toys-r-us/">its stores were growing old and shabby</a>, customer service was lousy and Target and Walmart were gaining market share.</p>
<p>In 2005, two buyout firms and a real estate trust <a href="https://www.businessinsider.com/the-tumultuous-history-of-toys-r-us-photos-2020-8#the-mounting-competition-led-to-the-eventual-closure-of-kids-r-us-14">won the bidding to take Toys R Us private</a> for $6.6 billion, using $5 billion in debt. Unlike Dell, who knew his business cold, Bain Capital, KKR & Co. and Vornado Realty Trust didn’t have much experience in the toy industry. And <a href="https://www.nytimes.com/2005/03/17/business/three-firms-are-said-to-buy-toys-r-us-for-6-billion.html">they followed a classic private equity strategy</a> of consolidation, closing marginal stores and cutting costs.</p>
<p>Also unlike Dell, Toys R Us never recovered. The <a href="https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/">significant debt incurred</a> in the buyout saddled the company with large interest payments that <a href="https://www.washingtonpost.com/business/economy/analysts-toys-r-us-might-have-survived-if-it-did-not-have-to-deal-with-so-much-debt/2018/03/15/42752326-286a-11e8-874b-d517e912f125_story.html">left little money to invest</a> in remodeling stores or building a competitive online business. Toys R Us <a href="https://www.theatlantic.com/magazine/archive/2018/07/toys-r-us-bankruptcy-private-equity/561758/">filed for bankruptcy in 2017</a>, 12 years after going private.</p>
<p>As I see it, Dell had a plan that fit his company’s environment – a <a href="https://www.researchgate.net/publication/313924776_Strategic_Fit">key concept</a> in the study of business strategy. Toys R Us’ buyers did not. </p>
<p>**</p>
<figure class="align-center ">
<img alt="the Twitter bird logo appears in white on a large dark screen as people making trades at a stock exchange wander underneath" src="https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/491991/original/file-20221026-23859-h5s605.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Shares of Twitter had been trading far below Musk’s offering price until recently, with many believing it wouldn’t happen.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/Musk-Twitter/bde3554cd27b43a79f448eb61f2e4b23/photo?Query=twitter&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=6361&currentItemNo=18">AP Photo/Seth Wenig</a></span>
</figcaption>
</figure>
<p>**</p>
<h2>Does Musk have a vision?</h2>
<p>So what does this all mean for Musk’s potential success at Twitter? </p>
<p>We still don’t know a lot about what he plans to do. </p>
<p>In <a href="https://www.sec.gov/Archives/edgar/data/1418091/000110465922045641/tm2212748d1_sc13da.htm">his April letter to Twitter shareholders</a>, he said, “I invested in Twitter as I believe in its potential to be the platform for free speech around the globe, and I believe free speech is a societal imperative for a functioning democracy.” One could ask whether that is a business model or a statement of sociopolitical philosophy.</p>
<p>In any case, he said Twitter can’t “thrive nor serve this societal imperative” as a public company. He’s also tweeted that he would fight bots on the social network, let Trump and others rejoin and potentially let users <a href="https://thehill.com/homenews/ap/ap-technology/ap-musk-has-a-super-app-plan-for-twitter-its-super-vague">pay bills via tweet</a> – part of his <a href="https://evannex.com/blogs/news/elon-musk-s-long-term-goal-to-turn-twitter-into-a-super-app">“Project X” super app idea</a>. </p>
<p>More recently, The Washington Post <a href="https://www.washingtonpost.com/technology/2022/10/20/musk-twitter-acquisition-staff-cuts/">reported that Musk plans</a> to cut Twitter’s 7,500 employees by about 75% – though on Oct. 26 <a href="https://www.bloomberg.com/news/articles/2022-10-27/musk-tells-twitter-employees-he-doesn-t-plan-to-cut-75-of-jobs?srnd=premium&sref=Hjm5biAW">he told Twitter employees in San Francisco</a> that he wouldn’t get rid of that many. He also promised Twitter <a href="https://www.wsj.com/articles/elon-musk-will-face-an-early-twitter-challenge-preventing-advertiser-flight-11666871828">wouldn’t turn into</a> a “free-for-all hellscape.”</p>
<p>Musk understands the physics of launching rockets and the engineering behind building an electric car, but he doesn’t have deep experience running a social media platform or in building super apps. I believe he doesn’t have a thoroughly thought-out strategy that fits Twitter’s difficult environment.</p>
<p>What he does have a huge amount of debt. Last year, Twitter owed about $51 million in interest on its debt. After going private, the estimates are that Twitter will <a href="https://www.barrons.com/articles/things-to-know-today-51666781185">owe at least a billion dollars</a> annually on <a href="https://www.forbes.com/sites/dereksaul/2022/10/25/elon-musk-reportedly-tells-bankers-hell-buy-twitter-by-friday-deadline/?sh=72147cae4a4c">about $13 billion in new debt</a>. </p>
<p>In 2021, the <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/1418091/000141809122000029/twtr-20211231.htm#i2ad918c563304a7eb6717a12dcfcee58_76">company generated just $630 million</a> in cash from operations. That means Musk won’t have much cash to fund a super app or any other big ideas, unless he is able to attract additional investment in the company.</p>
<p>With the company in his hands, Musk can, of course, do what he likes. He can implement any free speech policy that suits his fancy. He can let Trump and Ye tweet. He can ban Tesla short sellers and anyone who questions his <a href="https://www.npr.org/2022/10/04/1126714896/elon-musk-ukraine-peace-plan-zelenskyy">foreign policy initiatives</a>. He can fire 75% of his staff in a heartbeat – something a public CEO would have a very hard time doing.</p>
<p>It’s too soon to tell if taking Twitter private will be a Dell-like success or a Toys R Us disaster. But <a href="https://techcrunch.com/2022/04/14/elon-musk-buying-twitter-ted-talk/">given Musk has said</a> he “doesn’t care about the economics,” it may not matter.</p>
<p><em>This article was updated to reflect deal was completed.</em></p><img src="https://counter.theconversation.com/content/192799/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Erik Gordon does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Completing the $44 billion deal, following six months of turmoil, may be the easy part.Erik Gordon, Professor of Business, University of MichiganLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1594082021-05-20T17:46:08Z2021-05-20T17:46:08ZEntrepreneurs aren’t taking their companies public — and it’s a problem for our economy<figure><img src="https://images.theconversation.com/files/401713/original/file-20210519-15-7qf3bv.jpg?ixlib=rb-1.1.0&rect=0%2C208%2C5568%2C3492&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A sign board in Toronto's financial district shows the Toronto Stock Exchange's market value and gain. </span> <span class="attribution"><span class="source"> THE CANADIAN PRESS/Frank Gunn</span></span></figcaption></figure><p>Stock markets in Canada and the United States <a href="https://money.usnews.com/investing/stock-market-news/articles/why-the-market-is-booming-and-the-economy-is-struggling">are booming right now</a>. So why do so few companies want to join them? </p>
<p>With the exception of a couple of bad years, the last two decades have been a great time to be a public company. Valuations are at record highs and <a href="https://www.epi.org/publication/ceo-compensation-surged-14-in-2019-to-21-3-million-ceos-now-earn-320-times-as-much-as-a-typical-worker/">executive compensation has more than doubled as a percentage of corporate profits</a>. Nevertheless, <a href="https://www.investors.com/news/publicly-traded-companies-fewer-winners-huge-despite-stock-market-trend/#:%7E:text=Companies%20too%20small%20to%20compete,from%20S%26P%20Global%20Market%20Intelligence.">fewer and fewer companies and their managers want to take advantage of these opportunities</a>. </p>
<p>As we show <a href="https://www.policyschool.ca/wp-content/uploads/2021/04/FMR11_Capital-Markets_Tingle-Pandes.pdf">in a recent research study</a>, the number of companies choosing to go public in Canada has been declining sharply since the late 1990s. In fact, so few companies have been interested in listing publicly that the total number of Canada’s public operating companies has declined by more than 40 per cent on a per capita basis. American public markets are not much better. They’re about half the size they were back in the 1990s.</p>
<p>There is surprisingly little concern about this development among Canada’s regulators and politicians. This inattention is probably a mistake. Canada has four times the number of public companies per capita as the <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X03001259">United States and the United Kingdom</a>. It depends on its public markets to finance and grow new businesses in a way no other developed country does. </p>
<h2>Tech, pharma need public companies</h2>
<p>Even more important is the impact Canada’s public markets has on the ability to grow companies in high-value industries like technology or pharmaceuticals. <a href="http://itac.ca/wp-content/uploads/2013/07/StateofST2012_fullreportEN.pdf">Experts have pointed out</a> that Canada actually performs well at generating new ideas and starting new businesses. </p>
<p><a href="https://cca-reports.ca/wp-content/uploads/2018/10/2009-06-11-innovation-report-1.pdf">The country fails</a>, however, on scaling these new businesses up to a size where they can compete in world markets. Aside from one or two companies <a href="https://producthabits.com/shopify-grew-snowboard-shop-10b-commerce-ecosystem/">like Shopify</a>, we don’t create large technology, software, nanotechnology, biotechnology or pharmaceutical companies. </p>
<figure class="align-center ">
<img alt="Shopify headquarters" src="https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=326&fit=crop&dpr=1 600w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=326&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=326&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=409&fit=crop&dpr=1 754w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=409&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/401718/original/file-20210519-21-10anoeh.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=409&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Shopify is the exception, not the rule, in terms of Canadian startup success stories.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Adrian Wyld</span></span>
</figcaption>
</figure>
<p>Canada starts with technology that’s the best in the world in these sectors, but something happens before our companies become big enough to kick-start a new industry here. What happens? These valuable businesses get sold to larger companies within their industries, most of which aren’t Canadian.</p>
<p><a href="https://itac.ca/wp-content/uploads/2013/10/The-Issue-Building-Stronger-Tech-Companies-in-Canada1.pdf">One study</a> found that of 164 acquisitions of Canadian technology companies between 2004 and 2012, only a single company was purchased by a Canadian buyer. This turns into a vicious cycle — because we don’t have large, mature companies in many industries, the buyers of our promising startups are foreign, and because our startups are acquired early in their development, we don’t grow into large, mature companies.</p>
<h2>No spin-off benefits</h2>
<p>This dynamic means we lose the spin-off benefits of mature companies: we don’t train our workers in things like enterprise software sales or commercial nanotechnology research, and we don’t get new business ideas from older companies. Silicon Valley wouldn’t have become what it is today without beginning with large, mature firms like Xerox and Hewlett-Packard. Most entrepreneurs get their world-class ideas from working with more established companies.</p>
<p>What does Canada’s failure to scale technology businesses have to do with our public market problem? When a startup raises capital from outsiders, it must eventually provide them with an exit strategy so they can sell their shares. There are basically two kinds of exit: selling the company, usually to a larger company in its line of business, or taking the company public. </p>
<hr>
<p>
<em>
<strong>
Read more:
<a href="https://theconversation.com/canadian-startups-need-to-focus-on-corporate-governance-to-grow-and-thrive-149253">Canadian startups need to focus on corporate governance to grow and thrive</a>
</strong>
</em>
</p>
<hr>
<p>A public listing allows a company to continue to grow while permitting its early investors to sell their shares in the stock market.</p>
<p>Over the past two decades, an increasing number of companies have decided they would rather sell themselves than go public. What happened? </p>
<h2>Explanations don’t hold up</h2>
<p>In our research, we find that the usual explanations for the public market decline aren’t plausible. They either don’t explain why the decline is happening both in Canada and the United States, or they contradict the dominant fact of the last two decades: public companies have been getting more and more valuable.</p>
<p>Instead, we look at the ways public markets have changed to make corporate governance more painful, less effective and higher risk.</p>
<p>The biggest change over the past two decades or so has been a revolution in the ways public companies are run. Generally, this has involved the <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3815139">transfer of power</a> from managers and boards of directors to less informed and incentivized third parties like <a href="https://www.fm-magazine.com/news/2019/nov/role-of-proxy-advisers-201922438.html">proxy advisers</a> and even <a href="https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/money-manager/">money managers</a>.</p>
<p>By and large, these initiatives <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3094049">haven’t improved corporate performance</a>, but they have significantly increased the unpleasantness of going public. They take decisions about compensation, board composition, strategy and selling the company out of the hands of the people who know the business best and, as summarized in our research, give it to outsiders who are less effective. </p>
<p>This transfer of power also disadvantages workers, creditors and other constituencies important to the ultimate success of any business.</p>
<figure class="align-center ">
<img alt="A sign board in Toronto shows the closing number for the TSX with the CN Tower in the background." src="https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/401884/original/file-20210520-23-18tzrtb.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The TSX needs to abandon majority voting requirements, a measure that makes going public unattractive.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Frank Gunn</span></span>
</figcaption>
</figure>
<h2>The way forward</h2>
<p>In our recently published paper, we give a variety of concrete suggestions to reduce the penalties incurred by executives and boards if they take their companies public, and to make going public more attractive. </p>
<p>They include:</p>
<ul>
<li><p>Eliminating the majority voting requirements <a href="https://www.nortonrosefulbright.com/en-ca/knowledge/publications/9b173865/tsx-provides-guidance-on-director-election-requirements#:%7E:text=recent%20voting%20guidelines.-,Majority%20voting,tender%20his%20or%20her%20resignation.">that were adopted by the TSX in 2014</a>, which can make directors more vulnerable to shareholder action</p></li>
<li><p>Introducing effective staggered boards to give corporations the option to provide their managers greater independence from shareholder pressure</p></li>
<li><p>Eliminating an executive compensation disclosure regime that has produced precisely the opposite results from those intended</p></li>
<li><p>Abandoning any suggestion there are one-size-fits-all corporate governance best practices</p></li>
<li><p>Reining in the power of proxy advisers, who have become the de facto sources of corporate governance and executive compensation regulation in this country. </p></li>
</ul>
<p>These steps would clearly remove major barriers to Canadian companies choosing to scale up in this country.</p><img src="https://counter.theconversation.com/content/159408/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>I have previously received funding from the Social Sciences and Humanities Research Council (SSHRC) and the Canadian Securities Institute Research Foundation. But I do not currently have funding from them. </span></em></p><p class="fine-print"><em><span>Bryce Tingle does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Why are so many entrepreneurs in Canada avoiding going public, and what are the consequences for our economy?Bryce Tingle, N. Murray Edwards Chair in Business Law, University of CalgaryJ. Ari Pandes, Associate Professor of Finance, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1550842021-02-11T19:09:07Z2021-02-11T19:09:07ZInvestors swoon over Bumble’s IPO – but what exactly is an initial public offering?<figure><img src="https://images.theconversation.com/files/383870/original/file-20210211-23-1gdqo2i.jpg?ixlib=rb-1.1.0&rect=332%2C7%2C4826%2C3426&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Bumble's IPO raised $2.15 billion for the women-go-first dating app.</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/news-photo/an-afp-journalist-holds-his-phone-showing-the-dating-news-photo/1203460431">Eric Baradat/AFP via Getty Images</a></span></figcaption></figure><p>Bumble <a href="https://www.investors.com/news/technology/bumble-ipo-initial-public-offering-trades-thursday-bmbl-mtch/">raised US$2.15 billion in an initial public offering</a>, or IPO, late on Feb. 10, just in time for Valentine’s Day. Investors swooned over the women-go-first dating app, buying more shares and at a higher price than initially expected, valuing the company at $8.3 billion. </p>
<p>But what exactly is an IPO? </p>
<p>As a <a href="https://wvu.academia.edu/JFluharty">finance professor</a>, I believe understanding IPOs are an important part of knowing how markets work. More interesting to me, however, is how a new type of IPO is growing in popularity – including among the Redditors who are upending financial markets – and allowing more investors than ever to buy into the “hype” when a company goes public.</p>
<h2>Why companies go public</h2>
<p>Companies use IPOs – known as “going public” – to access the deep pockets of the U.S. stock market. At the end of 2020, <a href="https://siblisresearch.com/data/us-stock-market-value/">the IPO market was valued at over $50 trillion</a>.</p>
<p>To <a href="https://www.investopedia.com/terms/i/ipo.asp">understand what an IPO is</a>, think about starting a private business. You might deposit $50,000 into a bank account, purchase equipment and start operations. However, eventually, you will run out of money if you need to expand – especially if you are growing quickly.</p>
<p>To make life a little easier, you may attempt to obtain money from your friends or family or secure a loan from a bank. Similarly, public companies can access the stock market to raise money from investors in exchange for the promise of future profits and returns.</p>
<p>But in order to do that, first the company must go public.</p>
<p>When a business decides to go through with an IPO, it first goes to an investment banker – the same way you might go to a real estate broker when you decide to sell your house. The banker does all the same things that a broker might do, such as appraising the business by determining its value and risk and trying to match the company that is going public with well-heeled buyers who might be interested in buying a share of it. </p>
<p>In some cases, the banker might act more like a used car dealer, in which case the investment bank buys the company’s shares for a set price and then sells them to other investors later on at – it hopes – a profit. </p>
<p>In any case, the company going public doesn’t sell its new shares to “regular investors.” Instead the banks handling the deal turn to their favored wealthy clients, who initially buy shares and then sell them on to the public when the stock begins trading – usually at much higher prices than they paid. <a href="https://www.sec.gov/rules/final/2020/33-10824.pdf">Legal restrictions</a> mean the average individual cannot buy shares directly from an investment bank. So you typically need to be an accredited investor to be qualified, and trading app Robinhood’s army of day traders likely wouldn’t be eligible. </p>
<p>Success for an IPO typically means two things: The company gets as much as or more money than it aimed for, and the price “pops” on the first day of trading. </p>
<p>In Bumble’s case, <a href="https://www.sec.gov/Archives/edgar/data/1830043/000119312521025246/d20761ds1a.htm">it initially offered 34.5 million shares</a> at a price of $28 to $30, but <a href="https://seekingalpha.com/news/3660867-bumble-sets-ipo-at-39-dollars-a-share">overwhelming demand meant</a> it was able to sell 50 million at $43. That allowed it to raise well more than double the capital it had earlier planned on. </p>
<p>As far as whether early investors will get a first-day boost, <a href="https://finance.yahoo.com/quote/BMBL/">BMBL surged to $70.31</a> on Feb. 11 in its first day of trading on the NASDAQ stock exchange, creating a hefty profit for investors who bought into the IPO and sold their shares.</p>
<h2>Rise of the SPAC</h2>
<p>However, there’s a new IPO method in town that is becoming an increasingly common way for companies to go public: the SPAC IPO. </p>
<p>SPAC stands for special purpose acquisition company, and they have suddenly become the next big thing among <a href="https://www.reddit.com/r/wallstreetbets/comments/gy62lm/basic_introduction_to_spacs/">Redditors on WallStreetBets</a> who <a href="https://www.cnn.com/2021/01/27/investing/gamestop-reddit-stock/index.html">fueled the skyrocketing prices</a> of GameStop, AMC, silver and other securities in recent weeks. The zero-comission trading app Robinhood, which had been the Redditors’ favored place to buy stocks, <a href="https://www.pymnts.com/news/ipo/2021/robinhood-marches-on-with-ipo-despite-gamestop-trading-debacle/">is even considering doing a SPAC</a> rather than a normal IPO as it seeks to go public. </p>
<p>The difference is that a SPAC is like an IPO in reverse. An investor-led fund does an actual IPO – raising money from other elite Wall Street types – but with a shell of a company that has no operations. Known as a “blank check” business, its entire purpose is to eventually purchase an unspecified private company, thus making it public as well, and <a href="https://www.sec.gov/corpfin/disclosure-special-purpose-acquisition-companies">typically has two years to do it</a>.</p>
<p>In 2020, there were about the same number of <a href="https://insight.factset.com/u.s.-ipo-market-spacs-drive-2020-ipos-to-a-new-record">traditional IPOs as SPACs</a> for the first time <a href="https://www.econstor.eu/bitstream/10419/177392/1/2017-02-12%20SPAC%20IPOs%20Chapter%20SSRN.pdf">since the first SPAC was created in 2003</a>.</p>
<p>The upshot is that essentially anyone can invest in a SPAC and acquire a piece of the once-private company. Of course, this is also a very speculative investment, and it’s easy to lose everything. But that can be true of any IPO, which <a href="https://www.barrons.com/articles/SB52133021052493823286804580163941038934092">have historically underperformed the market</a>. </p>
<p>In other words, as always, <a href="https://corpgov.law.harvard.edu/2020/11/19/a-sober-look-at-spacs/">buyer beware</a>.</p>
<p>[<em>Insight, in your inbox each day.</em> <a href="https://theconversation.com/us/newsletters/the-daily-3?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=insight">You can get it with The Conversation’s email newsletter</a>.]</p><img src="https://counter.theconversation.com/content/155084/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan T. Fluharty-Jaidee does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A finance scholar explains what an IPO is, how it works and a new way companies are going public that’s winning the hearts of WallStreetBets Redditors.Jonathan T. Fluharty-Jaidee, Assistant Department Chair and Professor of Finance, West Virginia UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1517842020-12-10T16:47:44Z2020-12-10T16:47:44ZAirbnb going public is a maverick move<figure><img src="https://images.theconversation.com/files/374208/original/file-20201210-13-1m6zc9u.PNG?ixlib=rb-1.1.0&rect=0%2C3%2C1137%2C654&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">AirBNB IPO share price as at December 10, 2020. </span> <span class="attribution"><span class="license">Author provided</span></span></figcaption></figure><p>In early 2020, Airbnb’s management announced that to address the slowing growth in sales, it wanted to <a href="https://www.forbes.com/sites/deniselyohn/2020/11/10/how-airbnb-survived-the-pandemic--and-how-you-can-too/">scale back ancillary activities</a> and focus on the company’s core strength of mid-range and budget short-term rentals. This was just before COVID-19 stopped the travel and leisure industry in its tracks.</p>
<p>Against such a bleak backdrop, it was a surprise when the company’s CEO Brian Chesky announced that the online holiday rental company would go public in <a href="https://www.ft.com/content/cf865bb6-daea-11e9-8f9b-77216ebe1f17">December 2020</a> – and it did just that on December 10. </p>
<p>Shares were originally priced from US$45-US$50 (£34-£38) per share. <a href="https://www.theguardian.com/technology/2020/dec/07/airbnb-hikes-share-pricing-to-up-to-60-before-ipo-on-thursday">This went up</a> to US$55-US$60 the day before listing. By the time of the listing, the <a href="https://www.nytimes.com/2020/12/09/business/airbnb-ipo-price.html">final share price</a> was US$68. The Initial Public Offering (IPO) is expected to bring in fresh cash for the business of up to US$3 billion, and if successful, it will increase the value of <a href="https://www.wsj.com/articles/airbnb-sets-ipo-terms-sending-valuation-as-high-as-35-billion-11606835610">Airbnb close to US$42 billion</a>. </p>
<p>According to details filed by Airbnb with the <a href="https://www.sec.gov/Archives/edgar/data/1559720/000119312520294801/d81668ds1.htm">US Securities and Exchange Commission</a>, the plan is for the business to raise additional capital for funding future growth. </p>
<p>Typically businesses prefer to launch IPOs during a phase of sustained economic growth to gain advantage of the confidence in the market. They avoid IPOs during economic slumps and catastrophic events: like World War I and II, the great recession or a pandemic. Going by traditional corporate finance practice standards, <a href="https://www.pwc.com/gx/en/services/audit-assurance/ipo-centre/global-ipo-watch.html">Airbnb’s decision to go public</a> was nothing less than maverick. And its timing has attracted extraordinary attention.</p>
<h2>Airbnb’s IPO decision in a sea of business gloom</h2>
<p>But Airbnb had some strategic advantages, the first being its tech-based business model. Unlike other leisure and holiday businesses – such as hotels and airlines – Airbnb does not need to spend large amounts of money on the cost associated with the upkeep of its fixed assets. Instead, Airbnb can successfully pass on the risk of such rigid payment obligations to its “hosts” – the property owners. It then retains the profitable parts of the business for itself with enough agility to face systematic disruptions like Covid-19. </p>
<p>The company’s second advantage is that it has become a well known name in the word of travel, building a strong brand and a loyal customer base. If we compare the sales in the first nine months of the year for 2019 and 2020, everyone suffered a drop, but the decrease was least (in percentage terms) for <a href="https://www.ft.com/content/a82ad334-ed34-48bb-82e1-9e2e57c7b9c6">Airbnb</a> among all its close rivals like booking.com and Expedia. </p>
<p>In addition to its competitive status, ongoing <a href="https://www.ft.com/content/d47d875d-bf7f-4527-a879-a3f33761c78f">market changes</a> also created confidence for Airbnb’s IPO. Towards the end of 2020, markets across the world started reviving. South-East Asian, African and Latin American <a href="https://www.nationalgeographic.com/travel/2020/11/are-economics-driving-countries-to-reopen-to-tourists-coronavirus/">travel destinations reopened for business </a>, as <a href="https://www.theguardian.com/world/2020/nov/13/covid-vaccines-in-the-uk-who-is-in-charge-and-what-is-the-plan">vaccines for COVID-19</a> were announced. This bolstered confidence and hope for a return of “business as usual” and reflected in the immediate increase in the valuation of shares among the travel industry. The shares of Easyjet and Jet2 went up by more than 40%. </p>
<figure class="align-center ">
<img alt="Nurse holding COVID_19 vaccine bottle" src="https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/373976/original/file-20201209-19-1yowpya.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">COVID-19 vaccine hopes bolstered confidence in the markets.</span>
<span class="attribution"><span class="source">shuttershock</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Airbnb also managed to quieten its critics and avoid aggravating local housing regulators. However, adverse local regulatory reactions isn’t specific to Airbnb. Amazon, Facebook and Uber have all had their own stories. Given the combined bargaining power of the Silicon Valley giants, there are limited chances that any worldwide systematic regulatory change will happen in the near future. </p>
<h2>COVID-19 and Airbnb</h2>
<p>The travel and leisure industry in the UK were the main casualties of the pandemic. Airlines, hotels and holiday homes saw their revenue streams switched off almost overnight. The travel industry had already bid farewell to <a href="https://www.bbc.co.uk/news/business-53868447">STA Travel</a>, an agency for cheap flights. The latest <a href="https://www.ons.gov.uk/peoplepopulationandcommunity/leisureandtourism">UK travel statistics</a> indicate that the effect of the pandemic on the travel industry may result in further business collapses. The <a href="https://www.unwto.org/news/covid-19-international-tourist-numbers-could-fall-60-80-in-2020#:%7E:text=article%20on%20linkedin-,International%20Tourist%20Numbers%20Could%20Fall,80%25%20in%202020%2C%20UNWTO%20Reports&text=The%20COVID%2D19%20pandemic%20has,Tourism%20Organization%20(UNWTO)%20shows.">UN World Tourism Organization</a> (UNWTO) estimates that the travel and tourism sector has lost export revenues to the tune of US$910 billion to US$1.2 trillion. </p>
<p>As Airbnb enabled peer-to-peer consumption of travel accommodation or <a href="https://www.airbnb.co.uk/">experiences</a>, it also suffered its fair share of financial stress. In May 2020, it decided to sack 1,900 people from their jobs – almost a quarter of its <a href="https://www.businessinsider.com/airbnb-under-scrutiny-for-laying-off-1900-employees-2020-7?r=US&IR=T">workforce</a> and its market valuation fell from US$31 billion in 2017 to US$18 billion in April 2020. But with a market value that touched <a href="https://www.ft.com/content/d5aa43db-1aee-472f-abff-9ee315aa2e0c">US$60 billion</a>, minutes after trading begin on December 10, it seems to be poised for some rapid growth.</p>
<figure class="align-center ">
<img alt="Middle-aged man in brown t-shirt making hand gesture." src="https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=454&fit=crop&dpr=1 600w, https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=454&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=454&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=570&fit=crop&dpr=1 754w, https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=570&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/374263/original/file-20201210-21-1nspi5i.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=570&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Bullish approach: Brian Chesky, co-founder and CEO of Airbnb, February 2020.</span>
<span class="attribution"><span class="source">Wikimedia Commons</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span>
</figcaption>
</figure>
<h2>Hope for “normal”</h2>
<p>The travel and tourism industry is hopeful for a much faster recovery than other market segments. There are two reasons for this: first, there is a psychological demand for travel and holidays after a very long lockdown.</p>
<p>Second, the availability of cash. A significant part of the working population saved a large portion of their income by not spending on commuting and leisure costs. </p>
<p>The Airbnb IPO seems to be boldly positioned right at the expected beginning of the recovery in Europe and the improving market conditions encouraged last minute share issue price. </p>
<p>This successful IPO have brought in the required cash to feed its relentless growth, but more than that, it has proved the quality of its strategic leadership. It has also establish its dominant position in the online leisure and travel business for years to come, further boosting its competitive advantage. Of course, we must remember that these are just predictions and only time will tell.</p>
<p>For the markets in general, this IPO is a watershed movement that signifies the transformation towards an economic recovery based on hope for a return of “normal” life.</p><img src="https://counter.theconversation.com/content/151784/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Airbnb is taking a very bold step by issuing a multi billion dollar IPO during a global economic slowdown – something that was unthinkable a few years ago.Olga Cam, Lecturer in Accounting, University of SheffieldMohammad Rajjaque, Teaching Associate in Accounting and Finance, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1457942020-09-09T12:12:05Z2020-09-09T12:12:05ZHow Airbnb got its IPO plans back on track<figure><img src="https://images.theconversation.com/files/357188/original/file-20200909-18-1yp8pkl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Airbnb is gearing up for its long-awaited IPO.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/milan-italy-august-10-2017-airbnb-725635759">Shutterstock.com</a></span></figcaption></figure><p>It’s been a rollercoaster year for Airbnb and its much-anticipated plans for an initial public offering or IPO. The home sharing platform had planned to file back in March to go public but then coronavirus hit and its <a href="https://www.wired.co.uk/article/airbnb-coronavirus-losses">revenue nose-dived</a>. </p>
<p>Now, it looks like plans are back on track. Airbnb confidentially filed its IPO paperwork with the securities and exchange commission <a href="https://www.forbes.com/sites/sergeiklebnikov/2020/08/19/airbnb-confidentially-files-ipo-paperwork/">in mid-August</a>. None of the financial specifics were revealed but the company was <a href="https://www.reuters.com/article/us-airbnb-debt/airbnbs-new-1-billion-investment-comes-at-lower-valuation-sources-idUSKBN21P3IM">valued at US$18 billion</a> in its last funding round in April, which is a long way down from its previous 2017 valuation of US$31 billion.</p>
<p>Of course, like the entire tourism industry, the coronavirus pandemic has had an enormous effect on Airbnb’s finances. New bookings stopped, cancellation rates soared, <a href="https://www.theverge.com/2020/3/30/21200430/airbnb-cancellation-policy-coronavirus-covid-may-31-pay-hosts">refunds</a> to hosts and guests cost millions and <a href="https://www.wsj.com/articles/airbnb-racks-up-hundreds-of-millions-in-losses-due-to-coronavirus-11584723498?mod=article_inline">revenue fell</a>, even as cost cutting measures <a href="https://www.vox.com/recode/2020/5/5/21248381/airbnb-layoffs-brian-chesky-startups-coronavirus-pandemic-revenue">like layoffs</a> were implemented. To help mitigate this, it was forced to fundraise <a href="https://www.cnbc.com/2020/04/14/airbnb-raises-another-1-billion-in-debt.html">US$2 billion in debt and equity securities</a> in April 2020 with <a href="https://www.wsj.com/articles/airbnb-paying-more-than-10-interest-on-1-billion-financing-announced-monday-11586297484">onerous terms</a>. </p>
<p>So the decision to file its IPO paperwork and potentially list in 2020 was surprising to some. Critics point to the ongoing pandemic and the many issues it continues to throw up: the hosts and guests that have been angered by <a href="https://www.wsj.com/articles/airbnbs-coronavirus-crisis-burning-cash-angry-hosts-and-an-uncertain-future-11586365860">changing cancellation policies</a>, new laws and regulations in cities seeking to <a href="https://www.reuters.com/article/us-health-coronavirus-czech-airbnb/prague-aims-to-get-a-grip-on-airbnb-with-coronavirus-crisis-laws-idUSKCN21R1HZ">reclaim</a> housing for locals, as well as the <a href="https://www.bloomberg.com/news/articles/2020-08-12/airbnb-revenue-tanks-67-in-second-quarter-ipo-planned-for-2020">falling revenue and ongoing losses</a>. Others point to the <a href="https://venturebeat.com/2019/12/27/5-ipo-flameouts-that-defined-2019-uber-lyft-pinterest-slack-and-wework/">lacklustre IPOs</a> from sharing economy bedfellows Uber and Lyft in 2019, not to mention WeWork’s <a href="https://theconversation.com/fallout-from-weworks-failed-ipo-shows-the-folly-of-excessive-valuations-125014">fall from grace</a>.</p>
<h2>Reasons to IPO</h2>
<p>But there are lots of reasons to go public, including <a href="https://www.nytimes.com/2020/07/15/technology/airbnb-ipo.html">pressure from employees</a> (shares held by early employees will expire this year). But another big motivation is the fact that Airbnb has rebounded better than its competitors from coronavirus. Booking rates were <a href="https://www.bloomberg.com/news/articles/2020-08-12/airbnb-revenue-tanks-67-in-second-quarter-ipo-planned-for-2020">above expectations</a> from June 2020 onwards and the Airbnb model could take advantage of changing host and tourist behaviour during the pandemic. </p>
<p>The company’s overheads are far less than the hotel sector due to its limited fixed costs. It also took advantage of the rise in domestic staycations in <a href="https://www.cnbc.com/2020/08/06/rural-airbnb-bookings-are-surging-as-vacationers-look-to-escape-the-coronavirus.html">rural locations</a> across the globe, and the increased demand for countryside retreats where people could safely socially distance. Unlike hotels, short-term rentals tend to facilitate longer stays and can offer <a href="https://www.hospitalitynet.org/file/152006083.pdf">full-service amenities</a>, living space, and gardens. <a href="https://www.airdna.co/blog/covid-19-impact-on-hotels-and-short-term-rentals">Research shows</a> that the more spacious environments of short-term lets have been popular with holidaymakers and people wanting to work from home elsewhere. </p>
<p>Despite broad marketing cuts to reduce losses, Airbnb has <a href="https://www.fastcompany.com/40407506/what-airbnb-has-discovered-about-building-a-lasting-brand">strong brand recognition</a> through past campaigns like “<a href="https://www.prweek.com/article/1444913/airbnb-built-its-brand-telling-world-not-travel">Don’t go there. Live there</a>” that tapped into people’s desire to not just visit a place but have a more authentic experience of it. This helped it become the go-to platform for short-term rentals during the pandemic. </p>
<p>Hosts in rural areas also <a href="https://news.airbnb.com/rural-stays-and-online-experiences-boost-host-income/">responded to the demand</a> by listing. Meanwhile urban hosts responded by switching their properties to <a href="https://www.bloomberg.com/news/articles/2020-04-03/can-airbnb-survive-coronavirus">private rental</a>, or dramatically reducing prices.</p>
<figure class="align-center ">
<img alt="Airbnb logo held by a hand in front of wooden hut in countryside." src="https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=565&fit=crop&dpr=1 754w, https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=565&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/357185/original/file-20200909-18-uboszq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=565&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Rural retreats have risen in popularity.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/krakov-poland-july-2017-travel-around-752508031">AlesiaKan / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>While the broader tourism and hospitality sector is weak, perhaps Airbnb sees this stage of the pandemic as its time to shine and push ahead with its IPO. Plus, stock markets in the US are on a <a href="https://www.reuters.com/article/us-usa-stocks-s-p500-analysis/detached-from-reality-why-u-s-stocks-just-hit-a-new-high-idUSKCN25E1ZZ">record high</a>, fuelled by stimulus from Washington. </p>
<h2>Questions remain</h2>
<p>Questions remain for Airbnb, however. In particular, when will travel behaviour revert to business as usual, if ever? This will determine whether <a href="https://www.wsj.com/articles/airbnb-files-confidentially-for-ipo-with-sec-11597870752#:%7E:text=Airbnb%20Inc.%20said%20Wednesday%20it,ravaged%20by%20the%20coronavirus%20pandemic.">current bookings growth</a> will lead to profitability.</p>
<p>Then there are the safety issues that have dogged the company for years and played a big role in Airbnb’s <a href="https://www.bloomberg.com/news/articles/2020-03-12/airbnb-s-loss-nearly-doubles-in-fourth-quarter-before-virus-hit?srnd=technology-vp">loss of profitability in 2019</a>. It spent US$150 million on safety initiatives, including verifying the accuracy of listings, creating a 24/7 safety hotline and even <a href="https://www.vox.com/2020/2/12/21134477/airbnb-loss-profit-ipo-safety-tech-marketing">tied employee bonuses to safety</a>.</p>
<p>There is also the threat of more tax and regulation in major markets, which could emerge as authorities seek new revenue to pay for the effect of coronavirus on their economies. The basis of the favourable market conditions are also open to question, as there is concern that the current strength of the stock markets isn’t based on strong economic fundamentals and is a bubble <a href="https://seekingalpha.com/article/4372831-4-causes-of-u-s-stock-market-bubble">that’s waiting to burst</a>. </p>
<p>Success in the tourism industry is never a given. Airbnb will be all too aware of this, having totally <a href="https://hbswk.hbs.edu/item/the-airbnb-effect-cheaper-rooms-for-travelers-less-revenue-for-hotels?cid=wk-rss">disrupted the hotel industry</a>. Airbnb has more than 7 million listings – dwarfing the largest hotel chain, Wyndham Worldwide, which <a href="https://www.worldatlas.com/articles/the-largest-hotel-chains-in-the-world.html">has 8,000 hotels</a>. But rather than seeing this as a burden, Airbnb is capitalising on it. </p>
<p>But for all its <a href="http://eprints.bournemouth.ac.uk/26519/1/RANA_A_1283634.5-14.pdf">market positioning</a> as a different kind of travel provider – one that offers unique, authentic and personalised experiences – Airbnb still sits firmly with the tourism sector. Like its competitors, its success still depends on post-pandemic travel rebound.</p><img src="https://counter.theconversation.com/content/145794/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael O'Regan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Like the entire tourism industry, the coronavirus pandemic has had an enormous effect on Airbnb’s finances.Michael O'Regan, Senior Lecturer in Events and Leisure, Bournemouth UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1412522020-06-23T13:21:10Z2020-06-23T13:21:10ZUber, WeWork, Airbnb – how coronavirus is bursting the tech bubble<figure><img src="https://images.theconversation.com/files/343476/original/file-20200623-188886-1katr1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Coronavirus losers.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/milan-italy-june-10-2016-close-443281492">easy camera / Shutterstock.com</a></span></figcaption></figure><p>A handful of technology companies have benefited from coronavirus. Amazon has profited handsomely, as have streaming and video conferencing platforms <a href="https://theconversation.com/coronavirus-your-guide-to-winners-and-losers-in-the-business-world-134205">like Netflix and Zoom</a>. But the pandemic has laid bare the shaky foundations of a number of other platforms that bill themselves as technology companies and have enjoyed the high valuations that come with this label. </p>
<p>Major losers from the pandemic include the ride hailing apps: <a href="https://www.wired.co.uk/article/uber-coronavirus-chaos">Uber</a>, <a href="https://www.cityam.com/ride-hailing-app-grab-cuts-300-jobs-amid-coronavirus-hit/">Grab</a> (in South East Asia), <a href="https://www.cnbc.com/2020/05/20/softbank-backed-ola-lays-off-1400-employees-due-to-coronavirus-crisis.html">Ola</a> (India) and <a href="https://www.ft.com/content/83a065e2-5ed5-11ea-8033-fa40a0d65a98">Didi Chuxing</a> (China). Quite simply, people are not taking taxis. Office sharing businesses such as WeWork (which was, of course, <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">already struggling</a>) are also in trouble with <a href="https://www.theguardian.com/business/2020/apr/14/wework-coronavirus-impact-business-not-as-usual">virtually no occupancy</a>. A similar situation is occurring in the accommodation sector with <a href="https://www.wired.co.uk/article/airbnb-coronavirus-losses">Airbnb</a> and hotel bookings start-up <a href="https://uk.finance.yahoo.com/news/coronavirus-covid-19-oyo-hotels-uk-redundancies-exclusive-155109993.html">Oyo</a>. </p>
<p>As a result, investment in tech businesses is crumbling. But at the same time this is clearing the way for the few winners to buy bigger stakes in those that are struggling.</p>
<h2>Swimming naked</h2>
<p>Two decades on from the dot-com collapse there is the likelihood of another crash in the technology sector. As with the build up to the dot-com bubble, an abundance of venture capital funding <a href="https://www.ft.com/content/52a272dd-6575-4623-9ca4-18889bebad2d">has fuelled speculation</a> and encouraged investors to make bets on the next Google or Amazon. </p>
<p>As Warren Buffett <a href="https://money.com/swimming-naked-when-the-tide-goes-out/">once said</a>: “Only when the tide goes out will we see who has been swimming naked.” In effect, the tide has gone out and lots of start-ups that were billed as revolutionary technology companies are all in significant trouble. </p>
<p>The only redeeming feature at the moment is how much cash many start-ups have to withstand the collapse. How long they have will vary. WeWork will struggle to survive a year <a href="https://www.dailybeatny.com/2020/04/02/weworks-future-bleak/">without further investment</a>. The ride hailing apps meanwhile are <a href="https://www.bloomberg.com/news/articles/2020-03-19/uber-expects-4-billion-in-cash-reserve-in-worst-case-scenario">well funded</a> but may also find this to be a very difficult year. They are under pressure to cut their losses and break even but this goal is even further away now. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/343477/original/file-20200623-188911-1mgjbtv.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">More of a property company than a technology company?</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/san-mateo-causa-may-10-2020-1728168679">jejim / Shutterstock.com</a></span>
</figcaption>
</figure>
<p>The secretive Airbnb has recently been <a href="https://www.ft.com/content/bc26db3c-34dd-4ba9-bf0b-2ef422bfd3b6">raising money at high cost</a>. This suggests investors see a significant risk to the business and so cash is limited. The proposed listing this year is now <a href="https://techcrunch.com/2020/04/06/airbnb-turns-to-private-equity-to-raise-1-billion/">highly unlikely</a>. </p>
<p>A major problem with lots of the start-ups that are now struggling is that they look like technology businesses but they have merely used new technology to disrupt existing industries. Uber follows the dynamics of the taxi industry, WeWork the office rental industry, and Airbnb the accommodation booking industry.</p>
<h2>Winner takes all</h2>
<p>Facebook, Amazon and Google differ in that they all started new industries. They created network effects – where the more people that use the platform, the better it becomes – from which they benefited enormously.</p>
<p>Network effects can create a winner takes all situation. The more of your friends and colleagues who are on a particular social network the more likely you are to join and use it. Similarly the more suppliers who compete to sell on Amazon, the more choice and competitive prices is offered to customers. Having more customers attracts more sellers.</p>
<p>It is harder to see the network effects in businesses <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">like WeWork</a> – there are few reasons to be loyal and the entry barriers to market for competitors are low. Even with taxi ride hailing apps, in which Uber was a first mover, all taxi firms now have an app and network effects are quite limited once a level of responsiveness has been achieved – it’s easy for customers and drivers to switch to competition apps. </p>
<p>Similarly, accommodation booking sites are all accessed in the same way now via an app, and it is very easy to compare accommodation availability and costs. Airbnb was a first mover in home rental but this sector has been beset by <a href="https://fortune.com/longform/airbnb-deaths-fraud-safety-experiences-ipo-2020/">issues relating to fraud and safety</a>. </p>
<p>Hence all these markets are going to remain very competitive in the longer term and this means low margins and low returns. It is no surprise the share prices of ride hailing businesses have halved. In these industries technology is no longer a competitive advantage as almost all the competitors now have similar technology. The technology is simply infrastructure.</p>
<h2>Cash flow and consolidation</h2>
<p>Stock markets <a href="https://edition.cnn.com/business/markets/coronavirus">are shaky</a> and Airbnb has <a href="https://www.valuethemarkets.com/2020/03/17/airbnb-ipo-could-be-the-biggest-casualty-of-the-2020-stock-market-collapse/">cancelled its initial public offering</a>. The appetite for new listings is weak and is likely to remain this way, suggesting it will be difficult for venture capital investors to exit their investments. If there is no exit route to make money, then why invest? </p>
<p>A consequence is that there is likely to be a reduction in investment in technology start-up businesses. Cash will be in much shorter supply and venture capital investors will have to choose more carefully where to invest. </p>
<p>Meanwhile, we are already seeing the real technology giants move in. Amazon, for example, was the biggest investor in distressed UK takeaway app Deliveroo’s <a href="https://www.bbc.co.uk/news/business-48306172">latest round of fundraising</a>. This month also saw the merger of two other food delivery services, with Europe-based Takeaway.com, fresh from buying Just Eat, now <a href="https://www.theguardian.com/business/2020/jun/11/just-eat-uber-grubhub-takeover-food-delivery-service">buying US-based Grubhub</a>. We can expect more consolidation in the months ahead.</p><img src="https://counter.theconversation.com/content/141252/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Investment in tech businesses is crumbling but the winners are eyeing up the losers.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1260522019-10-29T14:39:19Z2019-10-29T14:39:19ZSoftbank: why WeWork’s Japanese investors are doubling down after a failed IPO<p>Why is Japanese investment firm SoftBank investing a further US$8 billion into WeWork, even though the office rental company is now valued at just US$8 billion, and buying out founder Adam Neumann <a href="https://techcrunch.com/2019/10/22/softbank-reportedly-ends-wework-ownership-debacle-with-a-1-7-billion-payout-to-adam-neumann/">at a further cost of US$1.7 billion</a>? Forgetting SoftBank’s previous sunk investments in WeWork – which exceed US$10 billion – as a standalone deal this looks to be a bad one. Some question whether WeWork is <a href="https://www.businessinsider.com/wework-valuation-could-slip-below-8-billion-softbank-bailout-report-2019-10?r=US&IR=T">even worth US$8 billion</a>. </p>
<p>To many, this looks like throwing good money after bad. The prospects of an IPO in the next few years look remote, as confidence following the <a href="https://theconversation.com/fallout-from-weworks-failed-ipo-shows-the-folly-of-excessive-valuations-125014">recent botched IPO</a> has been destroyed. Indeed SoftBank is likely to have difficulty making subsequent IPOs in its portfolio of firms work after this blow to its valuation credibility. </p>
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<a href="https://theconversation.com/fallout-from-weworks-failed-ipo-shows-the-folly-of-excessive-valuations-125014">Fallout from WeWork's failed IPO shows the folly of excessive valuations</a>
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<p>So WeWork has become a long-term investment for SoftBank, with little prospect of any serious return. The real motive for saving it may well lie in the company’s plans to raise US$108 billion <a href="https://www.ft.com/content/a4eb31d6-afcc-11e9-8030-530adfa879c2">for its second Vision Fund</a>. As with its first US$97 billion Vision Fund, SoftBank is trying to attract investors to trust it with investing in early stage, high growth companies. This next fund is touted to have a <a href="https://www.forbes.com/sites/samshead/2019/07/26/softbank-launches-new-108-billion-vision-fund-to-invest-in-ai/">focus on artificial intelligence companies</a> but the catastrophic write down on its WeWork investment has shaken confidence in it.</p>
<p>The WeWork saga follows SoftBank pouring US$20 billion from its first Vision Fund into high-risk ride hailing businesses Uber, Didi Chuxing, Grab and Ola. Ride hailing was always likely to be a <a href="https://theconversation.com/how-uber-crashed-in-china-63343">low-margin business</a> with low switching costs for drivers and customers and low entry barriers for competition. Didi Chuxing is <a href="https://techcrunch.com/2019/02/14/didi-reported-1-6-billion-loss/">haemorrhaging money in China</a> and the path to profitability remains elusive <a href="https://www.businesstimes.com.sg/brunch/show-me-the-money-whats-wrong-with-the-startups-picture">for Grab in South-East Asia</a>. Uber had a successful IPO but its shares have <a href="https://theconversation.com/overpriced-tech-ipos-sell-grand-visions-but-arent-worth-their-valuations-117292">performed poorly since</a>. As a result, India’s Ola, which looks like it might soon turn a profit, <a href="https://www.livemint.com/companies/news/ola-may-have-turned-profitable-plans-to-list-in-india-in-2-yearsola-may-have-tu-11570126128068.html">is delaying its IPO</a>.</p>
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<a href="https://theconversation.com/overpriced-tech-ipos-sell-grand-visions-but-arent-worth-their-valuations-117292">Overpriced tech IPOs sell grand visions but aren't worth their valuations</a>
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<p>But with WeWork, SoftBank has managed to destroy its own reputation as a tech investor <a href="https://techcrunch.com/2019/10/26/startups-weekly-softbank-is-screwing-up/">in one fell swoop</a>. Three months ago it was attempting to sell WeWork to the IPO market <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">at US$47 billion</a>, now they are rescuing the business with a total valuation of US$8 billion. The rescue has taken another US$9.5 billion, bringing Softbank’s investment to over US$18 billion in WeWork. </p>
<h2>No-win situation</h2>
<p>Softbank now controls the business and appears to be holding around 80% of the shares. Neumann <a href="https://techcrunch.com/2019/10/22/softbank-reportedly-ends-wework-ownership-debacle-with-a-1-7-billion-payout-to-adam-neumann/">has been bought out</a> of much of his equity and his super voting rights. Three months ago he was viewed as a major asset to the business, now he is a liability that needs a US$1.7 billion golden goodbye to remove. </p>
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<img alt="" src="https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=401&fit=crop&dpr=1 600w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=401&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=401&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/299257/original/file-20191029-183098-94pdbi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">WeWork founder, Adam Neumann.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/techcrunch/34679798345/in/photolist-bDWXTo-bDWXVm-scg1S5-Ufx5Kj-LjqG9H-UQx2PF-RDLNxp-scg1X5">TechCrunch/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>Softbank were in a no-win situation. If they walked away, which would’ve been by far the cheaper option, then WeWork would probably have folded and Softbank would’ve lost all their investment, around US$10 billion. It would not have been a good look. The approach they have chosen to take is to invest further substantial sums. There is little real prospect of return but it does defer the bad news of write downs surrounding WeWork until a later date.</p>
<p>Various measures are in place to make WeWork viable and actually worth the current US$8 billion valuation. Bear in mind that WeWork is running <a href="https://www.cnbc.com/2019/03/25/wework-says-sales-more-than-doubled-last-year-but-so-did-net-loss.html">losses of US$1.9 billion a year</a> so this will be no mean feat. But top SoftBank executives are now <a href="https://www.cnbc.com/2019/10/26/softbank-taking-masayoshi-sons-sprint-playbook-to-wework.html">calling the shots at WeWork</a>. Major cost-cutting is on the cards and the workforce will bear the brunt – 4,000 jobs are <a href="https://www.ft.com/content/ffa49378-f5b4-11e9-a79c-bc9acae3b654">already on the line</a>. </p>
<h2>Major strategic failings</h2>
<p>SoftBank made a very big bet that WeWork (and Uber) are “winner takes all” industries – <a href="https://theconversation.com/uber-cant-be-ethical-its-business-model-wont-allow-it-85015">like Amazon was for online shopping</a>. This gamble was based on the idea that they revolutionised their respective industries with their app design and technology. </p>
<p>But WeWork has major strategic failings in that it attempts to arbitrage long-term contracts with short-term rentals. Any recession or downturn is likely to put the model under strain. If the model is successful then competitors will follow, which will lower occupancy levels and push down profit margins. </p>
<p>It’s not clear that WeWork’s technology changes any of these traditional vulnerabilities of its business model. This argument over whether or not WeWork is primarily a tech company or a property company has been one that SoftBank has had with key Vision Fund backers <a href="https://www.ft.com/content/a4eb31d6-afcc-11e9-8030-530adfa879c2">from Saudi Arabia and Abu Dhabi</a> (together, they contributed 60% of the first Vision Fund). </p>
<p>It looks as though SoftBank is hoping to prove them wrong by refusing to cut its losses with WeWork. But investors will remain very cautious about further Softbank investments unless its focus changes significantly. Perhaps artificial intelligence will succeed as the next carrot, as Softbank’s current approach has clearly run its course.</p><img src="https://counter.theconversation.com/content/126052/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>SoftBank is pouring another US$8 billion into WeWork, even though the office rental company is now valued at just US$8 billion.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1250142019-10-14T10:09:22Z2019-10-14T10:09:22ZFallout from WeWork’s failed IPO shows the folly of excessive valuations<p>WeWork has undergone a dramatic fall from grace in the last few weeks. Just two months ago the office rental start up was expecting to offer shares to the public at a total business <a href="https://techcrunch.com/2019/07/23/wework-ipo/">valuation of US$47 billion</a>. This <a href="https://theconversation.com/wework-ipo-why-investors-are-beginning-to-question-the-office-rental-firms-value-121949">soon halved</a> and then investors rapidly pulled their support for an initial public offering (IPO) above US$12 billion. The IPO was withdrawn <a href="https://www.businessinsider.com/weworks-nightmare-ipo?r=US&IR=T">with catastrophic consequences</a> for the business and its charismatic founder Adam Neumann. </p>
<p>The fallout for tech IPO markets, and investment in start ups more generally may also be severe. WeWork follows a number of so-called unicorn valuations of more than US$1 billion that have gone public and subsequently nosedived in value. Its uncertain future reflects how investors have wised up to the hype around Silicon Valley start ups. </p>
<p>Certainly, WeWork had problems that were specific to the company. Its chief executive Adam Neumann was a worry to investors – he has since been deposed and is now a <a href="https://www.theguardian.com/business/2019/sep/24/adam-neumann-wework-step-down-ceo">non-executive chairman</a>. He is being followed to the exit by 20 of his senior supporters and family. The company jet is up for sale, nearly all future development is being curtailed, at least a third of the workforce of 15,000 are likely to lose their jobs and a number of recent acquisitions are being sold off. </p>
<p>WeWork’s financial situation was also a worry to investors. Its debt has been categorised by banks as “distressed” and concern is rising among landlords as to its viability. The company’s future liabilities to landlords <a href="https://www.ft.com/content/83decf7a-c04d-11e9-b350-db00d509634e">total US$47 billion</a>. There are even fears of a property recession as a consequence of curtailed demand. </p>
<p>WeWork has less than one year’s worth of cash left and without the IPO it will be very difficult to raise new money. It is losing almost US$2 billion a year and now <a href="https://www.cnbc.com/2019/03/25/wework-says-sales-more-than-doubled-last-year-but-so-did-net-loss.html">needs to stop the losses</a>. Some reports even suggest that WeWork <a href="https://www.ft.com/content/f29ecc58-eba9-11e9-a240-3b065ef5fc55">may not be viable beyond November</a> without an immediate rescue package. Investment bankers are desperately working on an attempt to rescue some value from this catastrophe.</p>
<h2>Excessive valuations</h2>
<p>The WeWork IPO saga follows hot on the heels of IPOs from taxi hailing apps <a href="https://edition.cnn.com/2019/09/04/investing/uber-lyft-ipo-market/index.html">Uber and Lyft</a> earlier in 2019, as well as the messenger app <a href="https://www.forbes.com/sites/sergeiklebnikov/2019/09/11/slack-stock-has-plunged-33-heres-what-happened/">Slack</a> and the much-hyped home exercise business <a href="https://fortune.com/2019/09/26/peloton-ipo-stock-drop/">Peloton</a>. All are now trading well below their offer prices. </p>
<p>Founders, early investors and investment banks have hugely overpriced a number of IPOs in the last few years, which means new investors could not profit from them. Appetite for technology IPOs is waning fast, as a result. An immediate consequence is the <a href="https://uk.reuters.com/article/us-endeavor-group-ipo/talent-agency-endeavor-abandons-ipo-amid-weak-investor-demand-idUKKBN1WB2HD">withdrawal of some planned IPOs</a> and deferral of others <a href="https://www.theguardian.com/technology/2019/sep/19/airbnb-ipo-2020-value">such as AirBnb</a>.</p>
<p>What is becoming clear is that investment banks cannot value loss making technology start ups for an IPO. <a href="https://www.nytimes.com/2019/05/15/technology/uber-ipo-price.html">Uber</a> was originally claimed to be worth US$120 billion, its IPO was valued at US$83 billion, and its current valuation is around US$55 billion. Many believe even <a href="https://techcrunch.com/2019/09/13/wework-and-uber-are-proof-valuations-are-meaningless/">that is excessive</a>. Similarly, WeWork was originally claimed to be worth US$70 billion, then US$47 billion but failed to reach even US$15 billion before withdrawal. </p>
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<img alt="" src="https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/296704/original/file-20191011-96257-1dtiwuk.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Uber’s stock has been down since its IPO in May.</span>
<span class="attribution"><span class="source">NYCStock/Shutterstock</span></span>
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<p>The same story for other IPOs has destroyed the credibility of investment bank valuations in loss making companies at their early stage of life. It may be that greed is driving these valuations, but the outcome is closing the IPO market so early investors cannot capitalise by exiting. </p>
<h2>Softbank’s hard landing</h2>
<p>Ultimately, venture capital investors like Japanese tech investment firm Softbank, must take some blame for inflating the IPO market. It is one of WeWork’s biggest backers, <a href="https://fortune.com/2019/10/10/softbank-wework-ipo-valuation-hedging/">with US$10.4 billion invested</a>, and has major stakes <a href="https://www.businessinsider.com/softbank-masayoshi-son-embarrassed-with-investments-after-wework-uber-troubles-2019-10?r=US&IR=T">in both Uber and Slack</a>. These are all companies with high growth rates but which remain a long way from profitability. </p>
<p>This focus on growth without regard for future profits has been a feature of the <a href="https://theconversation.com/why-2019-could-be-the-year-of-another-tech-bubble-crash-109468">recent boom in tech start-up investments</a>. Everyone is hoping to get in early on the next Amazon or Facebook. But, given that so much of the vast venture capital injections of cash into start ups has been wasted or extracted by founders as a result of poor supervision, investors must be more wary of who they are getting involved with. If there is a struggle to find a buyer or values fall dramatically, they must change the strategy of the businesses they invest in to produce profits more rapidly, which in turn will reduce growth rates. </p>
<p>Venture capital investors have none but themselves to blame for severely handicapping their own business model through excessive valuations. With the hype for tech start ups starting to recede, their choices are limited. Either invest further in a business with limited prospects or allow it to fail. This would be reminiscent of the dot.com era which sent significant numbers of start ups to the wall.</p><img src="https://counter.theconversation.com/content/125014/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>WeWork’s uncertain future reflects how investors have wised up to the hype around Silicon Valley start ups.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1219492019-09-09T12:01:43Z2019-09-09T12:01:43ZWeWork IPO: why investors are beginning to question the office rental firm’s value<p>WeWork looked set to become the latest tech startup to launch on the stock market at an astronomic valuation. It still could. The office rental company was initially valued around US$47 billion. Now there’s talk of this <a href="https://www.theguardian.com/business/2019/sep/05/wework-shares-ipo-value-halved">being halved to US$20 billion</a>. Even that is still a lot of money.</p>
<p>Following the recent <a href="https://theconversation.com/overpriced-tech-ipos-sell-grand-visions-but-arent-worth-their-valuations-117292">collapse of Uber and Lyft shares</a> after their initial public offerings (IPOs) potential investors in WeWork will have some valid questions: how much is it really worth behind the slick marketing? Will it be successful in the long run? </p>
<p>Many industries disrupted by tech newcomers have historically been highly competitive or prone to cyclical demand. With WeWork, it is not clear whether the new technology it introduces changes the traditional vulnerabilities of the industry.</p>
<p>A big question surrounding WeWork is the extent that it is really a technology business, as it bills itself to be, or simply a space rental business. There’s a WeWork app through which short-term office rental can be booked, starting at around one month for a desk, office, or space. But there are plenty of other companies that take out long-term leases on offices and refit the space for short-term rental at higher rates. </p>
<p>Nonetheless, WeWork captures the current trend of small early stage businesses that can’t afford permanent space but want something better than a coffee shop to work from. It also provides flexibility for more mature businesses to flex their office requirements. And it’s very popular – it has <a href="https://www.wired.co.uk/article/we-work-startup-valuation-adam-neumann-interview">250,000 members in 72 cities worldwide</a>.</p>
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<img alt="" src="https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=366&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=366&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=366&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=460&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=460&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291317/original/file-20190906-175700-1tuwfu9.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=460&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">WeWork in Washington DC.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/22526649@N03/32051734591">Ted Eytan / flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>The risk WeWork takes is that any collapse in demand will see them struggle to pay their landlords. This could be a recession or social changes in the nature of office demand. Balancing long-term liabilities that are paid for by short-term contracts comes with risks. </p>
<p>Fundamentally, WeWork’s finances do not look good. Apart from receiving major investor backing to become the biggest renter in many cities worldwide, it is still a long way from profitability and lost US$1.9 billion <a href="https://fortune.com/2019/08/14/weworks-ipo-filing-reveals-revenue-growth-and-cash-burn/">on sales of US$1.8 billion in 2018</a>. So for every dollar of revenue it makes, it spends two dollars.</p>
<h2>Risk of competition</h2>
<p>It is also relatively easy for others to enter the market, perhaps in less costly parts of the city. If WeWork is worth US$47 billion or even US$20 billion, this gives others an incentive to raise significant funds to compete with them. And, because WeWork offers short-term contracts, it is easy for tenants to move elsewhere if a better deal comes along. </p>
<p>There are no strong reasons to be loyal to WeWork. It has introduced a subscription service, which creates credits against future rentals. This does create some loyalty from customers, although it still remains relatively easy to cancel and move to a cheaper competitor. Switching costs are low unless WeWork can offer a variety of complementary services which others would have difficulty providing. </p>
<p>The problem is, WeWork is highly subsidised to attract its customers. This means the company will probably have to raise prices in the future to make money.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/291320/original/file-20190906-175668-cpu9bg.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The trendy interior of a WeWork in Japan.</span>
<span class="attribution"><a class="source" href="https://www.behance.net/gallery/79991777/Shark-neon-Pixel-wallpaper">Behance</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Highly subsidised rentals may attract people but many of them may not be interested at higher prices. This is the key issue with ride hailing and takeaway food delivery. Customers are initially subsidised to get them on board but what happens when investors want a return? Prices have to increase, which will reduce demand. The key issue is by how much? Many models simply do not work at higher prices, WeWork may also be such a model.</p>
<h2>No first mover advantage</h2>
<p>The main drivers of tech valuations are Facebook, Google, and Amazon which were among the very first in creating industries that did not exist previously. Facebook began the social media movement subsequently creating the industry, while Google was among the first search engines. Both benefited enormously from the move online of advertising from other media. </p>
<p>Most subsequent competition to Facebook is owned by Facebook (which bought Instagram and WhatsApp), while late entrant Snapchat is <a href="https://www.marketwatch.com/story/snap-is-struggling-in-one-area-where-it-needs-to-succeed-2019-04-23">struggling to make money</a>. Amazon was again among the first in creating a book trading platform which has diversified to almost anything which can go in the post, and similarly attracted major resource to grow rapidly.</p>
<p>Even if we were to consider WeWork a tech company, it isn’t the same as the big companies above. WeWork is not the first in this space but has arrived with the backing of significant resources at a time when there is a trend for cheap short-term office rental for startup businesses and others. And it does not have the network effects that have been crucial to the success of big tech companies like Amazon and Facebook. This is where the more customers that use them, the greater the value generated to other customers. </p>
<p>Ultimately, to be successful, tech startups need to be among the very first inventing an industry and attract substantial resources to grow rapidly. The ability to create network effects with high switching costs is important as otherwise competitors will rapidly follow. </p>
<p>Ride hailing, food delivery, short-term office rental and many other startup platforms are unlikely to fully satisfy these criteria for success and will suffer from later entrants competing on price. Indeed, WeWork fails on nearly all the criterion which determine whether a tech startup is likely to be successful in the long term.</p><img src="https://counter.theconversation.com/content/121949/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Fundamentally, WeWork’s finances do not look good. It is still a long way from profitability.John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1172922019-05-20T14:17:30Z2019-05-20T14:17:30ZOverpriced tech IPOs sell grand visions but aren’t worth their valuations<figure><img src="https://images.theconversation.com/files/275412/original/file-20190520-69209-40d1r1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">rblfmr / Shutterstock.com</span></span></figcaption></figure><p>The year of the tech IPO is 2019. Uber went public on May 10 with a <a href="https://www.nytimes.com/2019/05/09/technology/uber-ipo-stock-price.html">US$82.4 billion valuation</a>. Fellow ride-sharing app Lyft floated in March with a <a href="https://www.businessinsider.com/lyft-stock-how-valuation-compares-to-other-tech-names-at-ipo-2019-4">U$24 billion valuation</a> and Pinterest had a <a href="https://www.businessinsider.com/pinterest-prices-ipo-2019-4">US$10 billion IPO in April</a>. More big names – including Slack, Airbnb, WeWork and Palantir – are set to follow. </p>
<p>But Uber’s share price began to slide <a href="https://www.telegraph.co.uk/technology/2019/05/20/has-ubers-botched-public-listing-turned-investors-sour/">as soon as it went public</a>. Lyft’s shares have also been <a href="https://markets.businessinsider.com/news/stocks/lyft-stock-price-post-ipo-uber-debut-disappoints-2019-5-1028195575">on a downward trajectory since March</a>. So it’s worth considering how astronomic valuations for these non-profitable companies are calculated. Is there any science or rationale upon which to base the values, or are they purely hype on the part of those standing to benefit most? This would include early investors, the board and investment bank advisers promoting the offers.</p>
<p>In reality, there is surprisingly little evidence supporting IPO valuations. It is almost impossible to establish a relationship between the underlying data and the valuation. The main influences are clear: a resonant company vision and rapid user growth. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=314&fit=crop&dpr=1 600w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=314&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=314&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=395&fit=crop&dpr=1 754w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=395&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/275413/original/file-20190520-69192-piuzxt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=395&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Lyft’s share price has been falling since its IPO at the end of March 2019.</span>
<span class="attribution"><a class="source" href="https://finance.yahoo.com/chart/LYFT#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%3D">Yahoo! Finance</a></span>
</figcaption>
</figure>
<h2>Vision and growth</h2>
<p>A company’s vision normally sketches out how its future is going to be different to its competitors and how this will benefit the business (and shareholders). Uber and Lyft, for example, suggest that urban dwellers will not need to own a car, with access to their hassle-free vehicles. Somehow the <a href="https://mashable.com/article/lyft-ipo-self-driving-cars-investors/">introduction of autonomous vehicles</a> will also benefit the taxi hailing businesses. </p>
<p>The end of car ownership could be some way off and predicting the future over such a long time period is fraught with risk. The real vision for most technology platforms is to emulate Facebook, Amazon or Google and create <a href="https://en.wikipedia.org/wiki/Network_effect">network effects</a>, which is the phenomenon where the more customers you get, the more useful the product or service becomes, attracting more suppliers which in turn attracts more customers. </p>
<p>As for user growth, this may be measured in different ways – such as people signing up to the product or service and active, return customers. Growth trajectory is important. User growth forecasts are made, which do have some relationship to the valuation at IPO and beyond. </p>
<p>The focus on user growth, however, often fails to account for a business model’s switching costs. Businesses with low switching costs can gain users rapidly through low pricing, but lose them to someone else equally rapidly with the offer of a better proposition. </p>
<p>So take taxi ride hailing. Uber has <a href="https://www.forbes.com/sites/debtwire/2018/10/12/uber-says-its-three-years-from-turning-a-profit-as-it-pitches-debut-bond/#40c8ef3b5e0e">burnt billions of cash every year</a> by subsidising driver pay and offering customers cheap fares. At some stage investors will tire of funding this so prices will need to go up and driver incentives will need to be withdrawn. Both customers and drivers may then choose to go elsewhere. </p>
<p>Uber drivers on strike in the run-up to the IPO was a timely reminder of Uber’s precarious relationship with one half of its network, as well as providing <a href="https://www.theverge.com/2019/5/8/18537194/uber-driver-strike-ipo-public-relations-nyc">poor PR ahead of its IPO</a>. Uber’s growth slowed rapidly in 2018. In turn, cash burn increased as it attempted to maintain the critical user growth trajectory ahead of its IPO. </p>
<p>Meanwhile, competition remains strong, with traditional taxi firms increasingly developing their own apps, with no proprietary technology involved. So it begs the question: can the ride hailing tech company pay off, if profits are still yet to be made?</p>
<h2>Pay attention to cash burn</h2>
<p>The current rush of tech IPOs at early stages of their development is likely related to fears of investor fatigue setting in, particularly if companies keep falling below their initial price. Plus, there are signs that interest rates are on the rise, which will reduce the amount of money investors are willing to spend on IPO investments.</p>
<p>Following the dot com crash of 2000, the rate of cash burn should be taken as a warning sign to investors. The vast majority of venture capital-funded tech start ups collapsed as investors lost confidence <a href="https://theconversation.com/why-stock-markets-crash-lessons-from-recent-history-91409">in their ability to ever make profits</a>. Indeed the current batch of technology startup IPOs are taking place at a much earlier stage of company development than previous IPOs. As a consequence, they are much further from eventual profitability and cash generation than earlier IPOs. Uber lost US$3 billion in operating profit in 2018 <a href="https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm#toc647752_9">according to its IPO filing</a>, while Lyft <a href="https://www.sec.gov/Archives/edgar/data/1759509/000119312519059849/d633517ds1.htm">lost US$900m</a> and both admit to being some distance from making a profit. </p>
<p>The key issue for investors is whether IPOs allow new investors to make a return through the share price going up. If they are initially priced too high – <a href="https://www.cnbc.com/2019/01/16/snap-has-lost-more-than-20-billion-in-value-since-its-ipo.html">like Snap Inc in 2017</a> and, more recently, Lyft – then new investors are looking at losses. Snap is <a href="https://www.cnbc.com/quotes/?symbol=SNAP">down 32%</a> on its IPO while Lyft is <a href="https://finance.yahoo.com/quote/lyft?ltr=1">down 25%</a>. </p>
<p>Ultimately it is possible that both Uber, Lyft and other tech companies are worth very little. They are not yet profitable and there is little concrete evidence that they have any long-term value. Diminishing user growth, while spending huge amounts to try and mitigate their losses is a cause for concern. Valuations are almost entirely speculative and supported by little more than the trajectory of sales and user growth, funded by an enormous cash burn. In short, many of the tech IPOs of 2019 are about finding someone to buy the investment based on the promise of a grand vision, with few financial fundamentals to back it up.</p><img src="https://counter.theconversation.com/content/117292/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Colley does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Astronomic valuations for non-profitable companies are popular in Silicon Valley but how are they calculated and what do they reflect?John Colley, Professor of Practice, Associate Dean, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1167222019-05-10T10:38:55Z2019-05-10T10:38:55ZHow Uber and other digital platforms could trick us using behavioral science – unless we act fast<figure><img src="https://images.theconversation.com/files/273707/original/file-20190509-183086-1txshui.gif?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Your location isn't all it knows.</span> <span class="attribution"><a class="source" href="http://www.apimages.com/metadata/Index/Uber-NYC/366fdb3c801741569832e44979a97246/23/0">AP Photo/Mary Altaffer</a></span></figcaption></figure><p>Uber’s business model is incredibly simple: It’s a platform that facilitates exchanges between people. And Uber’s been incredibly successful at it, <a href="https://hbr.org/2014/11/what-airbnb-uber-and-alibaba-have-in-common">almost eliminating the transaction costs</a> of <a href="https://thezeromarginalcostsociety.com">doing business</a> in everything from shuttling people around town to delivering food. </p>
<p>This is one of the reasons Uber <a href="https://www.cnbc.com/2019/05/09/uber-ipo-pricing.html">is now</a> <a href="https://www.forbes.com/global2000/list/#header:marketValue_sortreverse:true_country:United%20States">among the most valuable companies</a> in the world after its shares began trading on the New York Stock Exchange on May 10. </p>
<p>Yet its <a href="https://www.nytimes.com/2019/05/10/technology/uber-stock-price-ipo.html">US$82.4 billion market capitalization</a> may pale in comparison to the wealth of <a href="http://dx.doi.org/10.2139/ssrn.2929643">user data it’s accumulating</a>. If you use Uber – or perhaps <a href="https://techcrunch.com/2017/04/23/uber-responds-to-report-that-it-tracked-users-who-deleted-its-app/">even if you don’t</a> – it knows a treasure trove of data about you, including your location, gender, spending history, contacts, <a href="https://www.forbes.com/sites/amitchowdhry/2016/05/25/uber-low-battery/">phone battery level</a> and even <a href="https://web.archive.org/web/20141118192805/http://blog.uber.com/ridesofglory">whether you’re on the way home from a one-night stand</a>. It may soon know <a href="https://techcrunch.com/2018/06/11/uber-applies-for-patent-that-would-detect-drunk-passengers/">whether you’re drunk</a> or not. </p>
<p>While that’s scary enough, combine all that data with <a href="https://movement.uber.com">Uber’s expertise</a> at analyzing it through the lens of <a href="https://eng.uber.com/applied-behavioral-science-at-scale/">behavioral science</a> and you have a dangerous potential to exploit users for profit.</p>
<p>Uber’s hardly alone. <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3385262">Our research shows</a> the biggest digital platforms – Airbnb, Facebook, eBay and others – are collecting so much data on how we live, that they already have the capability to manipulate their users on a grand scale. They can predict behavior and influence our decisions on where to click, share and spend. </p>
<p>While most platforms aren’t using all these capabilities yet, manipulation through behavioral psychology techniques can occur quietly and leave little trace. If we don’t establish rules of the road now, it’ll be much harder to detect and stop later.</p>
<h2>‘Choice architecture’</h2>
<p>A platform can be any space that facilitates transactions between buyers and sellers. Traditional examples include flea markets and trading floors.</p>
<p>A digital platform serves the same purpose but gives the owner the ability to “mediate” its users while they’re using it – and often when they’re not. By that we mean it can observe and learn an incredible amount of information about user behavior in order to perfect what behavioral scientists call “<a href="https://www.neotericdesign.com/articles/2018/11/choice-architecture-and-software-design-how-facebook-works-against-your-privacy-interests">choice architectures</a>,” inconspicuous design elements intended to influence human behavior through how decisions are presented. </p>
<figure class="align-right ">
<img alt="" src="https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=377&fit=crop&dpr=1 600w, https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=377&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=377&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=474&fit=crop&dpr=1 754w, https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=474&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/273852/original/file-20190510-183077-11ce80h.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=474&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Uber knows when your phone’s battery is getting low.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/bangkok-thailand-august-16-2018-iphone-1158142564?src=ObxPcN-GbnDaLeqN2CLGkw-1-6">boyhey/Shutterstock.com</a></span>
</figcaption>
</figure>
<p>For example, Uber <a href="https://www.nytimes.com/interactive/2017/04/02/technology/uber-drivers-psychological-tricks.html">has experimented with its drivers</a> to determine the most effective strategies for keeping them on the road as long as possible. These strategies include playing into cognitive biases such as loss aversion and overestimating low probability events, even if a driver is barely earning enough money to make it worth her while. Drivers end up like gamblers at a casino, urged to play just a little longer despite the odds. </p>
<p>Uber didn’t immediately respond to a request for comment. </p>
<p>Airbnb also experiments with its users. <a href="https://medium.com/airbnb-engineering/experiments-at-airbnb-e2db3abf39e7">It has used behavioral science</a> to get hosts to lower their rates and accept bookings without screening guests – which creates real risks for hosts, particularly when they are sharing their own apartment.</p>
<p>While these examples seem relatively benign, they demonstrate how digital platforms are able to quietly design systems to direct users’ actions in potentially manipulative ways. </p>
<p>And as platforms grow, they only become better choice architects. With its IPO’s huge influx of investor money to fund more data and <a href="https://www.npr.org/2016/05/17/478266839/this-is-your-brain-on-uber">behavioral science</a>, Uber could move into dangerously unethical territory – easy to imagine <a href="https://www.businessinsider.com/uber-company-scandals-and-controversies-2017-11">given its past practices</a>. </p>
<p>For example, if the app recognizes that you are drunk or in a neighborhood you rarely travel to – and one that its data show is high in crime – it could charge you a higher rate, knowing you’re unlikely to refuse. </p>
<h2>Legal challenges</h2>
<p>And it’s not all speculation. </p>
<p>In an effort to deceive law enforcement trying to investigate the company, Uber actually <a href="https://www.nytimes.com/2017/03/03/technology/uber-greyball-program-evade-authorities.html">found a way to identify government regulators</a> trying to use its app and then prevented them from getting rides. </p>
<p>That’s one reason lawmakers and regulators <a href="https://www.nytimes.com/2019/05/08/business/ftc-hearing-facebook.html">have been discussing</a> the difficult, interrelated roles of behavioral science and tech <a href="https://www.theguardian.com/technology/2017/jul/02/is-it-time-to-rein-in-the-power-of-the-internet-regulation">for years</a>. And some companies, <a href="https://www.theverge.com/2014/12/9/7363367/california-cities-sue-uber-for-misleading-customers-about-driver">Uber</a> in particular, have been investigated for a host of bad business practices, from <a href="https://blog.ericgoldman.org/archives/2018/11/racial-discrimination-lawsuit-against-airbnb-has-the-potential-to-change-online-marketplaces-harrington-v-airbnb.htm">discrimination</a> to <a href="https://www.theguardian.com/technology/2018/dec/19/facebook-cambridge-analytica-washington-dc-lawsuit-data">misusing user data</a>. </p>
<p>But most of the manipulation we’ve identified and worry about is not expressly illegal. And because regulators are often unable to keep pace with the ever-evolving use of technology and choice architecture, that’s likely to remain so. </p>
<p>Given the absence of well-defined and enforceable legal guardrails, platform companies’ propensity to exploit behavioral science at users’ expense will remain largely unchecked. </p>
<h2>An ethical code</h2>
<p>One solution, in our view, is establishing an ethical code for platform companies to follow. And if they don’t adopt it willingly, investors, employees and users could demand it. </p>
<p>Since the mid-20th century, written codes of ethical conduct <a href="https://pagecentertraining.psu.edu/public-relations-ethics/professional-codes-of-ethics/lesson-1-some-title-goes-here/a-brief-history-of-codes-of-ethics/">have been a staple</a> of U.S. companies. The legal and medical professions <a href="https://www.ama-assn.org/delivering-care/ethics/code-medical-ethics-overview">have relied on them</a> for <a href="https://www.medicinenet.com/script/main/art.asp?articlekey=20909">millennia</a>. And <a href="https://doi.org/10.1007/s10551-010-0521-2">research suggests</a> they are effective at encouraging ethical behavior at companies. </p>
<p>We reviewed hundreds of ethical codes, including ones targeted at tech and computing companies. Based on our research, we urge digital platforms to adopt five ethical guidelines: </p>
<ol>
<li><p>All choice architecture employed on a platform should be fully transparent. Platforms should disclose when they are using the tools of behavioral science to influence user behavior </p></li>
<li><p>Users should be able to make choices on the platform freely and easily, and choice architects should limit behavioral interventions to reminders or prompts that are the least harmful to user autonomy </p></li>
<li><p>Platforms should avoid “nudging” users in ways that exploit unconscious and irrational decision making based on impulse and emotion. <a href="https://www.sciencedirect.com/science/article/pii/S0167487017307845">New research</a> shows that transparent choice architecture can work just as well</p></li>
<li><p>Platforms should recognize the power they possess and take care not to exploit the markets they’ve created, including by abusing information asymmetries between themselves and users or opposing reasonable regulations</p></li>
<li><p>Platforms should avoid using choice architecture that discourages users from acting in their own best interests. As Nobel Prize-winning behavioral economist Richard Thaler <a href="https://www.nytimes.com/2015/11/01/upshot/the-power-of-nudges-for-good-and-bad.html">put it</a>, we should only “nudge for good.”</p></li>
</ol>
<p>Big tech and behavioral science are now integrated in ways that are making companies wildly successful, from <a href="http://mentalfloss.com/article/72501/toothbrush-sounds-can-make-us-better-brushers">buzzing toothbrushes</a> that make <a href="http://www.nudgingforgood.com/2015/10/06/the-magic-timer-app-oral-b/">cleaning your teeth</a> seem rewarding to <a href="http://www.nudgingforgood.com/2017/03/02/johnson-and-johnson-momconnect/">using texts to nudge poorer mothers to use health care</a>. </p>
<p>While the results can significantly enhance our lives, it also makes it easier than ever for companies to manipulate users to enhance their bottom lines.</p><img src="https://counter.theconversation.com/content/116722/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Abbey Stemler receives funding from The World Bank Group for her research. </span></em></p><p class="fine-print"><em><span>Todd Haugh is affiliated with The Poynter Center for the Study of Ethics and American Institutions.</span></em></p><p class="fine-print"><em><span>Joshua E. Perry does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Uber’s IPO will value the company at more than $80 billion, yet the data it collects on its users may be worth even more – and creates the potential for dangerous manipulation.Abbey Stemler, Assistant Professor of Business Law and Ethics, Indiana UniversityJoshua E. Perry, Associate Professor of Business Law and Ethics, Indiana UniversityTodd Haugh, Assistant Professor of Business Law and Ethics, Indiana UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1103242019-01-25T12:45:45Z2019-01-25T12:45:45ZSlack: how the messaging app could change after an IPO<figure><img src="https://images.theconversation.com/files/255147/original/file-20190123-135163-2hxxfg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Slack is especially popular in the tech world.</span> <span class="attribution"><a class="source" href="https://unsplash.com/photos/p-xSl33Wxyc">Farzad Nazifi via Unsplash</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Slack, the collaboration platform favoured by designers, developers and an increasing number of companies, is <a href="https://www.wsj.com/articles/slack-planning-to-pursue-direct-listing-11547202723?mod=hp_lead_pos6">rumoured</a> to be planning an IPO. In similar fashion to <a href="https://theconversation.com/spotify-goes-for-gutsy-direct-listing-on-stock-exchange-here-are-the-winners-and-losers-94209">Spotify</a>, it is reportedly considering going direct to market instead of using one of the household banks as an underwriter.</p>
<p>One suggested reason is that Slack’s investors <a href="https://www.reuters.com/article/us-slack-ipo/slack-seriously-considering-direct-market-listing-source-idUSKCN1P514A">can get out fast</a>. A direct listing is a way for the company to grow and attract funding in the most direct and least expensive way. </p>
<p>Slack fans have reason to be concerned. We are not talking buyout and takeover (yet). But we are talking a move that may bring shareholder pressure and influence, and with it the quest for short-term returns at the expense of longer-term creativity and innovation.</p>
<p>The current figures show how quickly Slack has grown. <a href="https://www.nasdaq.com/article/podcast-8-million-slack-users-and-two-other-numbers-you-need-to-know-cm1076356">One estimate</a> by financial news watchers Barron’s is “US$300m of annual recurring revenue which has more than doubled in the past two years”. In 2018 it was estimated to have reached <a href="https://techcrunch.com/2018/05/08/slack-hits-8-million-daily-active-users-with-3-million-paid-users/">8m daily active users with 3m paid users</a>. </p>
<p>For many individuals, groups, communities and entire large corporations Slack is becoming a core process for team meeting, product and process development, core decision making, information sharing and is even replacing email as a default mode of communication. A lot of people love the platform because of its independent roots, its independent spirit of innovation, its culture of plug-in tools and collaborative values. The company will have to be careful not to lose this appeal as it grows and gains more outside influence.</p>
<h2>Success is not a given</h2>
<p>With growth comes opportunity and the suggestion that Slack will publicly float this year isn’t surprising. The question that arises is, as with full acquisitions, will the landscape of shareholding quickly change and pressure the company to go for quick income, and drive risky and exciting innovation off the radar?</p>
<p>Success is not a given for any growing company. IPOs and buyouts can bring new opportunities, open up markets and enable investment in new product innovation. But the innovative, often boundary-pushing spark of smaller disruptive startups can be snuffed out as they become more established and try to appeal to a mass market. </p>
<p>There are, of course, risks from bigger competitors with established reach into larger corporations such as Microsoft’s Teams program, which was built to directly compete with Slack. Growth that comes from a public listing may be inevitable, but it comes with risks, and there may be a price to pay, depending on who invests and why. Private investment does have the advantage of being able to seek backers that align more with a company’s ethos and values.</p>
<p>Many innovative digital startups have been acquired by larger corporations who gobble up their originality and innovative capability. This is often to the horror of grassroots, early-adopter customers who feel these digital pioneers have sold out to mediocrity and risk-averse dinosaurs. And <a href="https://www.wired.com/story/facebooks-aggressive-moves-on-startups-threaten-innovation/">the evidence</a> is certainly growing that, as shareholder influence from outside becomes more prominent, innovation can get sacrificed in the pursuit of corporate mediocrity and shorter-term gains.</p>
<p>This is a classic story of how digital startups can get eaten up – as <a href="https://www.marketwatch.com/story/slack-plans-to-public-via-rare-direct-listing-in-coming-months--wsj-2019-01-11">happened with the social network Yammer</a>. Another oft-quoted example of how innovative initial products can become scuppered is <a href="https://www.bloomberg.com/news/articles/2018-05-10/don-t-skype-me-how-microsoft-turned-consumers-against-a-beloved-brand">Skype</a>, which was bought by Microsoft in 2011. From independent-spirited, game-changing startup, Skype is now a product set within the rules and desires of a big corporation and has lost users as a result.</p>
<h2>Value extractors vs creators</h2>
<p>There are no definitive studies of how public listings of digital firms either stimulates or stifles innovation over time, though there is certainly anecdotal evidence. The view that “prevailing stock market ideology enriches value extractors, not value creators” is <a href="https://www.huffingtonpost.com/entry/how-shareholder-value-is-killing-innovation_us_5980d9cee4b0b35d274c5e36">increasingly stated</a>. It can indeed suppress and even kill off innovation. </p>
<p>For platforms such as Slack, this relates to being proactive and responsive in relation to its current and potential user base, taking risks, being bold, creative and boundary breaking. Will a public listing attract those looking for more guaranteed rewards? Much will depend on the level and type of new shareholder influence and interference. </p>
<p>What we do know from the research is that when shareholders intervene more, this tends <a href="https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=AFA2016&paper_id=1426">to block innovation</a> and ultimately impacts the bottom line. For Slack, this could look like underfunding for innovation and limiting risk taking and creativity. Or if higher revenues are sought through selling user data or partnerships with corporate interests, for example, this could hurt the brand’s popularity with users. </p>
<p>This is a risk for those who have committed to Slack in order to <a href="https://www.business.com/articles/how-slack-is-changing-workplace-communication/">change their workplace culture towards something more collaborative</a> and smarter working habits. Slack reaches deeply into that culture and that commitment could prove to be damaging if the product is diluted or changed in ways that stifle that culture change. </p>
<p>There is no evidence that this will happen with Slack, but it is worth posing the question: will Slack lose its grip on its founding values and innovative roots as new shareholder interests start to take hold? Those who have embedded Slack into their company cultures might just need a Plan B.</p><img src="https://counter.theconversation.com/content/110324/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Levy owns shares in CATS3000 Limited</span></em></p>Shareholder pressure and influence brings with it the quest for short-term returns at the expense of longer-term creativity and innovation.Paul Levy, Senior Researcher in Innovation Management, University of BrightonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/795572017-07-04T12:04:19Z2017-07-04T12:04:19ZWhy are companies choosing to steer clear of public markets?<figure><img src="https://images.theconversation.com/files/176613/original/file-20170703-15991-1xzmstx.jpg?ixlib=rb-1.1.0&rect=33%2C76%2C2008%2C1266&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/thesamizdat/7163968772/in/photolist-bV4djY-pi1Vka-3LzV9D-qVcxXC-4vtmCC-pbWN4H-cVzuHf-hkNDJt-qBjxrU-dn5SKv-j5sGQ3-qoiPyk-ffZ14J-qVxAv-d8qm11-GCqNFA-ivrFSP-s9QvxN-7bLUS7-bNavcR-So1eV4-5nFCDp-nqecG7-3LzJRV-jFcxSa-bXDQyu-dVij31-qnmSxr-nhNgT7-9orSMF-ToqDSf-3LzTqr-oWQb6d-cYyjAL-gyUofm-nZ6tjd-9ELGBE-59UeqF-4UPE8c-cufMkS-bPsWkF-8tEbtz-kLXnn6-3LzPsk-e6vZ4u-58Yjgy-dDxvnv-cYyjdG-fyqA2e-61jsDK">The-Samizdat/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Companies are getting shy about going public. The number of firms choosing to list their shares on UK stock markets hit a decade-long low in 2016. So what, you might think. Well the trend for firms to stay private, outside the glare of public scrutiny, is a worry for us all.</p>
<p>Just 97 UK firms made initial public offerings (IPOs) <a href="http://www.londonstockexchange.com/statistics/companies-and-issuers/companies-and-issuers.htm">last year</a>. This compares to an average of 155 a year over the last decade and a peak of 480 in 2005. These trends are consistent with the US. Over the last 18 years, American IPOs have come in at <a href="https://www.statista.com/statistics/270290/number-of-ipos-in-the-us-since-1999/">an average of 180 a year</a>. In 2016, it was just 105. In fact, the number of publicly-listed US firms fell from 7,322 in 1996 <a href="http://www.economist.com/news/business/21721153-company-founders-are-reluctant-go-public-and-takeovers-are-soaring-why-decline">to just 3,671</a> in 2017. In the UK, it has fallen <a href="http://www.londonstockexchange.com/statistics/companies-and-issuers/companies-and-issuers.htm">to about 2,000</a> from <a href="http://topforeignstocks.com/2012/10/29/number-of-uk-publicly-listed-companies-continue-to-decline/">close to 3,000 in 2011</a>.</p>
<p>IPOs do come in waves. The recent peaks arrived with the tech boom in the early 2000s, and there was a clear and understandable slowdown in the aftermath of the financial crisis. But the latest data from the London Stock Exchange shows the trend at a time of relative confidence in markets. </p>
<p>Staying private essentially means that a company’s shares are not traded on public stock markets, like the FTSE in London or the Dow Jones in New York. The company still has shares, but these are held by the company founders, their families, or a select group of investors. If you want to buy shares in this firm, you have to make a request to the existing owners. The question is, why is this approach becoming so popular?</p>
<h2>In control</h2>
<p>First, founders and bosses get full control over senior executive pay. Because a small group of existing shareholders dictate who buys the shares, it makes it far less likely that activist shareholders will <a href="https://www.ft.com/content/f0a65020-2bf2-11e7-9ec8-168383da43b7">reject controversial pay awards</a>. </p>
<p>Staying private also avoids the onerous disclosure requirements from stock exchanges. Some companies fear that a small failing in due diligence could lead to troublesome interest from regulators, or even expulsion from a stock exchange. </p>
<p>The costs can be significant too. A firm listing on <a href="http://www.londonstockexchange.com/companies-and-advisors/aim/aim/aim.htm">London’s AIM stock exchange</a> for small companies will have to pay in the region of £350,000-£400,000, with a further <a href="http://www.withersworldwide.com/news-publications/listing-on-the-main-market-of-the-london-stock-exchange-an-overview--2.pdf">6% of any funds raised being paid to brokers</a>. </p>
<h2>Horizons</h2>
<p>Shareholders who buy stocks on the public markets may be in it for a quick buck. That can mean publicly-listed companies get railroaded into strategies that deliver short-term gains so investors can sell up and book a profit.</p>
<p>Private investors, by contrast, will tend to have a more long-term view, and can wait for a number of potential risky innovations or strategies to bear fruit. Some long-term private equity funds have a standard investment timeframe of <a href="https://www.bvca.co.uk/Portals/0/library/documents/EY/EY%20Annual%20report%20on%20performance%20of%20portfolio%20companies%20-%20December%202016.pdf">as much as a decade</a>, meaning they can sit tight waiting for investments in research and development to pay off – family-owned firms have a similar advantage. </p>
<p>Now, all of these disincentives for public listing can be swept away by the incredible fundraising power of public markets. It used to be the only reliable way to raise large amounts of capital. And prior to the <a href="https://www.sec.gov/spotlight/jobs-act.shtml">Jumpstart Our Business Startups (JOBS) Act of 2012</a>, firms in the US had to go public if they had more than 500 shareholders. This is the ruling that <a href="https://dealbook.nytimes.com/2011/01/03/facebook-and-the-500-person-threshold/">forced Facebook to go public</a> in search of more capital. Now that firms can have up to 2000 shareholders, fewer firms need to go to the public markets. </p>
<p>And at the same time, crucially, private markets have evolved to provide sufficient wealth for many firms to remain outside the stock market. Poor returns from bank deposits have sent more large investors <a href="https://www.ft.com/content/ec583614-521c-11e7-a1f2-db19572361bb">in search of higher returns</a>, often to <a href="https://www.forbes.com/sites/antoinedrean/2017/01/25/ten-predictions-for-private-equity-in-2017/#3fe2b9f67db9">those private equity funds</a>. </p>
<p>Simply put, if the money is available through private markets, then the appeal of public markets is limited. In fact, public markets can hold you back. The time taken to seek shareholder approval for major strategy changes can slow down a business. Uber founder Travis Kalanick was able to take his privately-held firm through several changes of direction before settling on a virtual ride-sharing service. </p>
<p>It starts to sound like an easy decision to stay private. The trouble is, the shrinking of the public market brings unwelcome effects. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=423&fit=crop&dpr=1 754w, https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=423&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/176618/original/file-20170703-16961-1tv7ei.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=423&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">New sources.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/howardlake/4550764222/in/photolist-7W8RE7-e7Rkxu-e9XNLd-e9S3FH-FW7q9-a6oGNn-c4fQ4d-ifXqaC-nMan63-cuu8Jd-e9XSNN-uLZJJ-aANmED-e9YjSb-czE4Po-gb7jCe-9VDo4N-biaL98-e9Sstx-e9XY3j-4KUwVw-eejztc-e9Y2n7-9VAaeR-cJriWq-e9SCSB-e9Y7NJ-e9Soxt-e9Sjer-5mEo2b-e9Y9bh-88gko9-8SuvYA-7QgV9P-8PmDGz-5Wo6ks-6zASWp-71heXn-9kMyo5-q8f1fk-a1kPrb-amYHQD-7NXdCV-4pYt4y-6dk2Fj-e9SBjM-e9Sr8z-e9S4TV-bFjNbT-9Vzsr7">Howard Lake/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<h2>Public goods</h2>
<p>The stock exchange has long been a redistributive mechanism of wealth. The general public can buy into new firms and share in their success through dividend payments and shares. Anyone with a company pension scheme gains access to corporate success. Without a healthy market in IPOs, the market gets smaller, capital becomes more tightly held, and in theory, inequality gets worse. </p>
<p>Going public can also be a stimulus to <a href="http://www.workforce.com/2000/05/02/how-to-court-talent-in-the-ipo-age/">recruit top talent</a>. A company preparing for IPO is advised to bring in the best CEO and chief financial officer <a href="http://www.ey.com/Publication/vwLUAssets/EY_-_Guide_to_going_public/$FILE/EY-guide-to-going-public-SGM.pdf">one to two years</a> before so they can build relationships and galvanise staff. And an IPO can be a reward for those patient staff and investors whose hard work and loyalty can now be rewarded with shares. </p>
<p>Companies can also derive a moral benefit from the transparency of public markets. This is particularly true of growing global stars, like Uber and AirBnB, that are <a href="https://www.forbes.com/sites/jacobmorgan/2015/12/17/are-uber-airbnb-and-other-sharing-economy-businesses-good-for-america/#55a7ce6c5deb">changing employment and social practices</a>. A broad base of public ownership is more democratic than ownership by wealthy and invisible individuals, and opens up boardrooms to the views of more of society. </p>
<p>In truth, the argument that secrecy looks bad, and that more voices should be heard, is unlikely to tempt today’s more retiring plutocrats to go public. Many of these individuals value the privacy and flexibility of private ownership, and are nervous of entering into the costs and publicity of a public market. They will happily ignore the strongest argument of all that companies should share their wealth in what is becoming an increasingly unequal society.</p><img src="https://counter.theconversation.com/content/79557/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Udeni Salmon does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>We all miss out when corporates keep themselves to themselves.Udeni Salmon, Research Associate, Keele UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/780252017-05-25T02:08:14Z2017-05-25T02:08:14ZFive reasons investors shouldn’t swear off IPOs<p>With the recent share price woes of law firms <a href="http://www.asx.com.au/asx/share-price-research/company/SGH">Slater & Gordon</a> and <a href="http://www.asx.com.au/asx/share-price-research/company/SHJ">Shine</a>, as well as the <a href="https://theconversation.com/the-ugly-story-of-dick-smith-from-float-to-failure-55625">collapse of Dick Smith</a>, investors <a href="http://www.afr.com/business/more-than-8b-in-ipos-at-risk-as-investors-get-nervous-20170517-gw6n4c">have become wary</a> of initial public offerings. </p>
<p>But listing shouldn’t be getting such a bad rap. Assuming the business is developed enough to list, there are quite a few upsides, particularly for smaller investors. Here are just five.</p>
<h2>1) Increased credibility and detection of wrongdoing</h2>
<p>Listed firms are subject to greater oversight and scrutiny. In Australia, this comes from the <a href="http://www.asx.com.au/documents/about/abridged-continuous-disclosure-guide-clean-copy.pdf">ASX continuous disclosure obligations</a>. These require firms to promptly disclose information that could impact the share price. </p>
<p>Even though both listed and unlisted firms are <a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/legis/cth/consol_act/ca2001172/s1041e.html?stem=0&synonyms=0&query=corporations%20act%20section%201041e">subject to disclosure obligations</a>, observing poor disclosure is easier for listed firms. Listed firms must make continuous disclosures, including publicly available, audited, financial reports.</p>
<p><a href="http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/FCA/2011/717.html?stem=0&synonyms=0&query=asic%20AND%20centro">The ruling in one court case</a>, in which directors had relied on auditors’ reports without examining the financial data themselves, directors were found to be responsible for accurate information in these reports. They cannot shirk this responsibility. </p>
<p>It’s also easier to take actions against listed firms. ASIC is more prone to investigate disclosure violations of, and class actions are easier to launch against, listed firms.</p>
<p>Both of these are made easier because of easily identifiable disclosure violations. For class actions in particular, a drop in a company’s share price is a loss that is easily quantifiable and provable in court. This, in turn, makes it easier to find funding for a class action. </p>
<p>Class actions <a href="https://doi.org/10.1016/j.jfi.2011.09.001">can harm CEO careers</a> as well as diminish their compensation. These personal consequences should deter false and misleading conduct. Indeed, it is <em>because</em> of these disclosures that shareholders could discover the <a href="https://www.mauriceblackburn.com.au/current-class-actions/slater-and-gordon-shareholder-class-action">alleged disclosure problems at Slater & Gordon</a>.</p>
<h2>2) Improved corporate governance</h2>
<p>Listing forces businesses to improve corporate governance in ways that unlisted companies aren’t exposed to. This manifests in several ways: </p>
<p><strong>Board composition:</strong> The ASX has governance guidelines that <a href="http://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf">suggest</a> firms have a majority independent board, nominating committee, and audit committee, in addition to an independent chairperson. Listed businesses must comply or <a href="http://www.asx.com.au/regulation/corporate-governance-council.htm">explain why not</a>. </p>
<p><strong>Compensation:</strong> With publicly traded stock it is easier to <a href="https://doi.org/10.1016/j.jfineco.2016.01.022">pay executives with equity or with share options</a>. This aligns their incentives with those of other shareholders. </p>
<p><strong>Activist investors:</strong> Publicly traded companies are more likely to have active investors - major investors who scrutinise and lobby for changes in companies. This can force businesses to reform governance, improve performance and increase corporate value. Recently, activist investing has come to prominence in Australia with Elliott Associates <a href="http://www.smh.com.au/business/markets/elliott-associates-bhp-campaign-a-welcome-boost-for-local-activists-20170522-gwa2dr.html">pushing BHP to make changes</a>.</p>
<h2>3) Better access to capital</h2>
<p>Listed companies can expand and grow easier than their unlisted counterparts. This is because bidders can pay for acquisitions by using either cash or stock. Facebook, for example, <a href="https://newsroom.fb.com/news/2014/02/facebook-to-acquire-whatsapp/">bought Whatsapp using mostly its own shares</a>. </p>
<p>According to data from SDC Platinum, the majority of large takeovers involve bidders exchanging their stock for that of the target. These “stock for stock” bids are more difficult for unlisted companies due to the challenges of valuing an unlisted bidder’s stock, and the unwillingness of target shareholders to take illiquid, unlisted, equity.</p>
<p>Cash acquisitions are also easier for listed companies because they have better access to debt. This is because lenders have more confidence in listed firms’ governance arrangements and such firms are more transparent. This, in turn, enables firms to expand. For example, AT&T’s bid for Time Warner involves <a href="https://www.wsj.com/articles/time-warner-deal-adds-to-at-ts-heavy-debt-load-1477271620">significant debt</a>. </p>
<p>If the firm faces challenges, it can also enable firms to recapitalise: For example, ANZ <a href="http://shareholder.anz.com/share-purchase-plan/information">recently issued new shares</a> in order to meet additional regulatory requirements.</p>
<h2>4) Improved visibility and credibility with customers and suppliers</h2>
<p>Listing on a stock exchange can also increase credibility with customers and suppliers. This can make it easier to find opportunities and otherwise do business.</p>
<p>But research also shows that customers and suppliers <a href="http://dx.doi.org/10.1016/j.jcorpfin.2013.10.005">respond negatively</a>
when listed companies violate their expectations. This can result in higher costs and less sales.</p>
<p>Unlisted firms, on the other hand, receive less attention than those that are listed.</p>
<h2>5) Liquidity itself can create value</h2>
<p>Lastly, listing on a stock exchange and having shares that can easily be bought and sold can itself create value. Studies show it raises the price a bidder will pay relative to an unlisted firm <a href="https://doi.org/10.1016/j.jfineco.2006.01.004">by 15-30%</a>.</p>
<p>From a shareholder’s perspective, selling shares in a listed company is easy. You just need a broker. For larger shareholders, they can retain a bank to algorithmically trade their order so as to minimise the risk that their large trade will drop the share price of a company. This type of trading is impossible for an unlisted company. </p>
<p>All up there are many benefits of listing. They accrue to shareholders in general, and smaller shareholders in particular. These are some of the reasons why law firms like Slater & Gordon should list, despite recent problematic performance.</p><img src="https://counter.theconversation.com/content/78025/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Humphery-Jenner receives funding from the Australian Research Council</span></em></p>Despite some recent problems, there are many advantages to going public.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/757592017-05-23T13:52:48Z2017-05-23T13:52:48ZHow the Aramco IPO will make history and transform Saudi Arabia’s economy<figure><img src="https://images.theconversation.com/files/170574/original/file-20170523-5755-1yk1nh2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"></span> <span class="attribution"><span class="source">shutterstock.com</span></span></figcaption></figure><p>The US and Saudi Arabia have signed hundreds of billions of dollars <a href="http://www.reuters.com/article/us-saudi-usa-trump-deals-factbox-idUSKCN18G0JY">worth of business deals</a> following Donald Trump’s trip to the oil-rich state. The biggest deal was for <a href="http://www.cnbc.com/2017/05/22/defense-stocks-rally-on-110-billion-us-saudi-arabia-weapons-deal.html">nearly US$110 billion worth of weapons</a> (extending to US$350 billion over ten years). But a number of smaller agreements were made between Saudi and US firms, as part of Riyadh’s goal to diversify its economy. </p>
<p>Saudi Arabia’s economy is almost entirely dependent on oil exports and the need to diversify has become increasingly evident in recent years. A global glut in oil has caused prices <a href="https://theconversation.com/how-oil-and-gas-companies-are-dealing-with-low-prices-52928">to fall dramatically since 2014</a> and countries are increasingly turning to renewable sources to meet their energy needs. </p>
<p>Ultimately, the issue of <a href="http://www.geo.cornell.edu/eas/energy/the_challenges/peak_oil.html">peak oil</a> makes diversifying its economy crucial. Saudi Arabia’s oil reserves are not inexhaustible so it cannot rely on oil exports to prop up its economy forever. A move towards a productivity and an investment-led economy is therefore needed to serve the country’s long-term strategic goals. </p>
<p>Central to this are plans to partially float the country’s giant state oil company, Saudi Aramco. It is gearing up to sell shares in part of the company in what will be the biggest IPO in history. The market value of Aramco is estimated <a href="https://www.forbes.com/sites/ellenrwald/2017/02/25/the-worlds-biggest-ipo-is-coming-what-you-should-know-about-aramco/#7b682b86535f">to be around US$2 trillion</a> – significantly more than Alibaba Group’s US$25 billion, which <a href="https://theconversation.com/alibaba-investors-gamble-on-rise-of-ecosystem-internet-in-record-breaking-ipo-31807">shattered IPO records in 2014</a>. Even with only 5% of the company up for grabs, it is still set to be the world’s biggest IPO and marks a significant shift for Saudi Arabia’s economy.</p>
<p>Saudi Arabia has almost a fifth of the world’s proven oil and gas reserves and is the largest producer of oil and gas in the world. This is entirely governed by Saudi Aramco and the ministry of energy and mineral resources. It is estimated that Aramco’s reserves are the largest an oil company has ever owned, <a href="https://www.washingtonpost.com/business/economy/saudi-arabia-a-kingdom-built-on-oil-plans-a-future-beyond-it/2017/04/21/6574d2ee-251a-11e7-bb9d-8cd6118e1409_story.html?utm_term=.9e2efe77e839">at 266 billion barrels</a>.</p>
<p>But Saudi officials have always avoided discussing issues related to peak oil. No clear data has been made known about the country’s <a href="http://www.reuters.com/article/us-saudi-oil-kemp-idUSKCN0ZL1X6">exact oil reserves</a>, so it is hard to predict at what point the country will hit peak oil production. Nonetheless, oil discoveries, exploration and production around the world <a href="http://peakoilbarrel.com/what-is-peak-oil/">seem to have peaked</a> and it is no longer beneficial to deny this fact. Plus, the crash in crude oil prices since 2014 left Saudi Arabia with a <a href="http://www.reuters.com/article/us-saudi-economy-debt-idUSKCN18G0TD">big budget deficit</a>. </p>
<h2>A new vision</h2>
<p>The 31-year-old deputy crown prince and son of the king, Mohammed bin Salman, set out a new vision to transform the country’s economy by 2030. Named <a href="http://vision2030.gov.sa/en">Vision 2030</a>, it is packed with targets for education, transport, fostering new private business and cutting the budget deficit. And central to the economic transformation is the proposal to raise money through selling just 5% of the US$2 trillion worth Aramco.</p>
<p>The IPO would allow Saudi Arabia a significant source of liquidity (a predicted US$100 billion) that can be used to plug the budget deficit and make new investments. If the expected funds are invested well into productive areas of the economy (as is intended), the country’s economy would be boosted and its GDP <a href="http://www.oxfordstrategicconsulting.com/latest-news/vision-2030-initiatives-aim-to-attract-up-to-1-trillion-in-fdi-over-next-15-years/">could be doubled</a>. For example, <a href="https://www.bloomberg.com/news/articles/2017-02-20/saudis-kick-off-50-billion-renewable-energy-plan-to-cut-oil-use">investments in renewable energy</a>, while sustaining the kingdom’s future energy security, would also enable it to conserve valuable oil for exports. Meanwhile, investing in the Islamic tourism sector could <a href="http://www.oxfordbusinessgroup.com/news/saudi-arabia-revamp-tourism-sector">bring billions to the Saudi economy</a>. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=376&fit=crop&dpr=1 600w, https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=376&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=376&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=473&fit=crop&dpr=1 754w, https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=473&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/170572/original/file-20170523-5782-br7iaw.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=473&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Saudi Arabia is hoping solar energy will help fuel its economic development.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>This investment would create new jobs and significantly reduce the unemployment rate. At a high of <a href="https://www.forbes.com/sites/dominicdudley/2016/12/08/saudi-unemployment/#1aa64e892022">12% last year</a>, this would, in turn, help the government curb its large spending on subsidies for citizens.</p>
<p>The money raise from the IPO would also make Saudi Arabia a world class global investor. The country’s sovereign wealth fund, which has 90% of its portfolio within Saudi Arabia, <a href="http://www.reuters.com/article/us-saudi-usa-trump-fund-idUSKCN18G066?il=0">recently announced</a> it will start slowly increasing its investments overseas. The aim is to obtain better technology for domestic industries and boost returns on its financial reserves. This was a big part of the Saudi king’s recent <a href="http://www.reuters.com/article/us-saudi-asia-idUSKBN1631P0">month-long tour around Asia</a>, as well as promoting the Aramco IPO. </p>
<p>There is still no date set for the IPO to take place. It was originally expected to take place in early 2018, but the Saudi government seems intent on making sure that the company is in as best shape possible to make it attractive to investors. After all, a lot is riding on the Aramco IPO raising the US$100 billion record-smashing estimate.</p><img src="https://counter.theconversation.com/content/75759/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Hafez Abdo does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Saudi Arabia’s economy is almost entirely dependent on oil. Here’s how it’s trying to change that.Hafez Abdo, Senior Lecturer in Accounting, Nottingham Trent UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739212017-03-03T10:06:28Z2017-03-03T10:06:28ZSnapchat beats expectations with its IPO but big challenges lie ahead<figure><img src="https://images.theconversation.com/files/159108/original/image-20170302-14717-1wfqt84.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Ink Drop / Shutterstock.com</span></span></figcaption></figure><p>After weeks of speculation, Snap Inc, the owner of messaging app Snapchat, has gone public. Its shares were initially <a href="http://www.independent.co.uk/news/business/news/snapchat-owner-snap-debuts-on-wall-street-valuing-company-above-expectations-at-19-billion-ipo-a7606996.html">priced at US$17</a>, with stocks jumping 44% to US$24.48 on the first day of trading. It brings the value of the business to US$28 billion, making it the biggest technology IPO since Alibaba <a href="https://theconversation.com/alibaba-investors-gamble-on-rise-of-ecosystem-internet-in-record-breaking-ipo-31807">made its debut in 2014</a> and reflects huge demand, considering the initial offering of shares was expected to be between US$14-16.</p>
<p>Many doubted that Snap Inc would achieve such a result. Its popularity is a given, but its ability to generate revenue is highly questionable (it is yet to turn a profit). Plus, we have become accustomed to the hype surrounding these “hot” tech IPOs and the question remains whether the valuation that investment banks come up with for these companies actually makes sense given their fundamentals – or lack of them. The valuation of high growth companies is intrinsically difficult and they are highly risky investments by their very nature.</p>
<h2>Lessons from Facebook and Twitter</h2>
<p>The premises of Facebook and Twitter’s IPOs were very similar to Snap’s, but have had two very different outcomes. They offer two different pictures of the direction Snap could take.</p>
<p><a href="http://www.investopedia.com/articles/markets/081415/if-your-would-have-invested-right-after-facebooks-ipo.asp">Facebook’s IPO</a> in May 2012 was considered by many to be a failure because the stock price nearly plunged below the offer price of US$38 at the opening of trading. Typically, there is a jump in the price above the initial offer price when trading in the secondary market starts – a phenomenon that is <a href="https://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/?_r=0">known as underpricing</a> and that is commonly (and mistakenly) interpreted as a sign of the success of an IPO. </p>
<p>In the case of Facebook, there was virtually no underpricing, however. In fact, the underwriters had to stop the price of the stock from falling below the IPO price by buying back shares. </p>
<p>Facebook’s share price went on to struggle for over a year, before rising above its IPO price. Now, though, they are trading at about US$136 a share – 259% above the IPO price – and the company has actually been able to generate profits. </p>
<p>Twitter, meanwhile, has had a <a href="http://www.cnbc.com/2015/08/20/twitter-stock-falls-below-ipo-price.html">totally different story</a>. When it went public in November 2014, like Facebook, it was also priced at the top of the initial price range (which was US$26) and on the first day of trading the stock closed at US$44.90. This 73% increase was acclaimed as a big success after the disappointing performance of Facebook a year before. </p>
<p>Three years on, however, and Twitter is currently trading <a href="https://finance.yahoo.com/quote/TWTR?p=TWTR">at around US$15</a>. That’s a 42% decline from its IPO price and the company has consistently generated losses since.</p>
<h2>Snapchat’s future</h2>
<p>So where is Snapchat’s IPO likely to stand between its two forbears? In the short run, the rise in Snap’s shares on the first day or trading will have made a lot of people rich. That’s the “flippers” – investors who buy at the offer price and sell at the market price immediately after. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"837309480111058951"}"></div></p>
<p>In the long run, however, it is likely to be a different story. On average, newly-floated companies are <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1991.tb03743.x/full">known to underperform</a> when compared to their peers in the three to five years that follow the IPO. This means that an investor who buys shares in Snap now is likely to lose money on it in the long term. </p>
<p>Will the company’s strategy be successful and ultimately be able to turn losses into profits? Snapchat operates in a relatively niche fast-paced market and competition is fierce. When Instagram brought out a feature that almost replicates Snapchat, Instagram Stories, last summer, it had an immediate effect on Snapchat’s customer base, which saw an <a href="https://techcrunch.com/2017/02/02/slowchat/">82% decline in growth</a>. Nonetheless, its average daily users are still at 158m, compared to <a href="https://www.statista.com/statistics/346167/facebook-global-dau/">1.23 billion for Facebook</a> and less than <a href="https://www.bloomberg.com/news/articles/2016-06-02/snapchat-passes-twitter-in-daily-usage">140m for Twitter</a>.</p>
<p>Shareholders seem to have signalled that they believe Snapchat will ultimately prevail – to the point that they clamoured to buy the company’s initial offering of shares, in spite of a significant concern. In an unprecedented decision for a US IPO – something Snap <a href="https://www.sec.gov/Archives/edgar/data/1564408/000119312517029199/d270216ds1.htm">acknowledged in its prospectus</a> – shares bought in the offering will not carry voting rights over the company’s decision making. Instead, the company’s decisions will be controlled by its two co-founders, Evan Spiegel and Bobby Murphy, who together control about 89% of the voting power. </p>
<p>They will need to put on a good show – it’s not just Facebook that they need to beat, but the rival start-ups that are constantly jockeying for attention on the tech scene.</p><img src="https://counter.theconversation.com/content/73921/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Sonia Falconieri does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Demand has surged for Snapchat’s stock but the loss-making company’s long-term success is far from certain.Sonia Falconieri, Reader in Finance, City, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/344212014-11-19T19:26:02Z2014-11-19T19:26:02ZMedibank Private float offers retail investors an early Christmas gift<figure><img src="https://images.theconversation.com/files/64968/original/image-20141119-31615-gl73ee.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Finance Minister Mathias Cormann says Medibank Private shares are expected to cost retail investors around $1.55-$2 per share.</span> <span class="attribution"><span class="source">Dan Himbrechts/AAP</span></span></figcaption></figure><p>The privatisation of Medibank Private will be complete next Tuesday when the company lists on the Australian Securities Exchange. That’s exactly one month before Christmas Day and all indications suggest retail investors who applied for shares in the public offer are in for a nice little present.</p>
<p>While the wide indicative price range for retail investors ($1.55 to $2.00) has been <a href="http://www.abc.net.au/news/2014-10-27/medibank-private-offer-turns-retail-buyers-into-cannon-fodder-f/5845000">criticised</a>, a key guarantee provided in the prospectus is they will not pay more than $2.00 per share. This guarantee exists regardless of the price currently being determined for institutional investors through the so-called book-building process. </p>
<p>Finance Minister <a href="http://www.theaustralian.com.au/business/news/medibank-value-could-hit-63bn-as-float-demand-pushes-up-price-range/story-e6frg906-1227127918322">Mathias Cormann has announced</a> that, due to strong demand, institutional investors will now pay between $2.00 to $2.30 per share. This means it is almost certain that retail investors who subscribed to the Medibank Private offer will buy shares at the capped price of $2.00.</p>
<p>Institutional investors are only likely to pay in the range of $2.00 to $2.30 per share if they believe this will be as cheap as buying the shares via the ASX. A small caveat is that some institutional investors may be prepared to pay more via the book-building process than via the securities exchange. This is simply to ensure they get all the shares they want.</p>
<p>Therefore the trading price is expected to be substantially higher than the $2.00 paid by retail investors. As retail investors prepare for this windfall - gifted to them by their fellow taxpayers - it is worth noting that this is pretty much par for the course in government privatisations.</p>
<h2>Just another profitable privatisation for investors</h2>
<p><a href="http://www.tandfonline.com/doi/abs/10.1080/135048596356050">Studies</a> show previous Australian privatisations have been consistently profitable for investors. The table below illustrates that for the 12 previous Australian government floats the share price at the end of the first day of trading has been lower than the subscription price on only one occasion.</p>
<p>Better still, the average one-day return across these privatisations has been 11.29%. It needs to be stressed this is a return earned on the first day of trading. It is not the same as a return that is earned over a year on a portfolio of shares. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=303&fit=crop&dpr=1 600w, https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=303&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=303&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=381&fit=crop&dpr=1 754w, https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=381&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/64934/original/image-20141119-7378-pbjeel.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=381&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">First-day returns from Australian government IPOs 1989-2014.</span>
</figcaption>
</figure>
<p>Many retail investors may be considering whether to keep their investment in Medibank for the long term, or cash in on the expected windfall by selling their shares immediately after they list on the securities exchange. Cashing in while in front is appealing to many investors. There is <a href="http://www.economia.unimib.it/DATA/moduli/7_6069/materiale/shefrin-statman-85.pdf">strong evidence</a> that investors tend to be too quick to sell strong-performing shares and too slow to get rid of poor performers. </p>
<p>However, there are two important factors to consider before making that decision. First, cashing in early can have tax implications. Capital gains tax is reduced by half for most individual investors who hold their shares for at least a year. So selling early effectively doubles an investor’s tax bill.</p>
<p>A second consideration is <a href="http://onlinelibrary.wiley.com/doi/10.1111/j.1755-053X.2010.01069.x/pdf">evidence that suggests</a> government privatisations are not only good for investors in the short run, they may also be good in the long term. For example, companies that have been privatised over the past 25 years generated strong share price returns over the three years after listing. This return on shares was, on average, the market return plus 4.8% per year. </p>
<p>This is likely to be because companies tend to be <a href="http://www.oecd.org/daf/ca/corporategovernanceofstate-ownedenterprises/1929649.pdf">more efficient when operated privately than by the public sector</a>. These efficiencies are not fully anticipated when the companies first list, so the shares outperform as the efficiencies are realised.</p>
<p>In the case of Medibank Private, it has been <a href="http://www.theaustralian.com.au/business/latest/medibank-privates-57bn-price-tag/story-e6frg90f-1227074398066">widely reported</a> the company has been operating less efficiently than most of its competitors. The expected growth of Medibank through inevitable cost-cutting should be factored into the price by institutional investors. However, privatised companies appear on average to outperform expectations.</p>
<p>If history repeats itself, Medibank Private may just prove to be the gift – from taxpayers to investors – that keeps on giving.</p><img src="https://counter.theconversation.com/content/34421/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Docherty receives research funding from Platypus Asset Management.</span></em></p><p class="fine-print"><em><span>Steve Easton receives funding from Platypus Asset Management</span></em></p>The privatisation of Medibank Private will be complete next Tuesday when the company lists on the Australian Securities Exchange. That’s exactly one month before Christmas Day and all indications suggest…Paul Docherty, Senior Lecturer, Newcastle Business School, University of NewcastleSteve Easton, Foundation Professor of Finance, University of NewcastleLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/333822014-11-03T15:09:22Z2014-11-03T15:09:22ZSaudi bank’s IPO brings financial redemption after religious controversy<figure><img src="https://images.theconversation.com/files/63538/original/h44cdzz8-1415015389.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Riyadh's market on the rise?</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/saqibkhan/8355868313">KhanSaqib</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Saudi Arabia’s largest lender, National Commercial Bank (NCB) has <a href="http://www.bloomberg.com/news/2014-11-03/fatwa-no-obstacle-for-ncb-s-6-billion-ipo-islamic-finance.html">attracted 215.8 billion riyals</a> (US$58 billion) of bids from about 1.2m investors following its initial public offering. Despite attracting religious controversy for being un-Islamic, the retail portion of the US$6 billion sale was oversubscribed by almost 16 times. </p>
<p>Initial results show that the sale is the second biggest of the year behind Chinese e-commerce giant, <a href="https://theconversation.com/alibaba-investors-gamble-on-rise-of-ecosystem-internet-in-record-breaking-ipo-31807">Alibaba’s US$25 billion IPO</a>. It is also the largest IPO ever in the Middle East, surpassing the US$5 billion raised by Dubai’s DP World Ltd in 2007.</p>
<p>NCB was the only unlisted lender of Saudi Arabia’s 12 domestic banks, with total assets of US$100.5 billion. It was the most profitable bank in the kingdom last year and this IPO is sure to be part of a careful plan by the Saudi government to spur financial activity.</p>
<h2>The kingdom opens its gates</h2>
<p>This IPO has a long term financial implication for Saudi Arabia. The kingdom is preparing to open up its stock exchange, <a href="http://www.bloomberg.com/news/2014-10-01/saudi-arabian-bank-ncb-to-raise-6-billion-in-share-sale.html">valued at about US$590 billion</a>, to foreign investors in the first half of next year. Though currently closed to foreign investors, rules were proposed in August 2014 that would allow them to hold as much as <a href="http://www.bloomberg.com/news/2014-09-21/saudi-regulator-clears-share-sale-of-largest-lender-ncb.html">10% of the value of Saudi Arabia’s Tadawul stock exchange</a>. So this IPO plays an important role in the national economy by boosting confidence in the Saudi stock market.</p>
<p>The IPO also boosts the status of Saudi Arabia in the growing Islamic finance market. The kingdom has been ranked second in <a href="https://www.zawya.com/islamic-finance-development-indicator/">Reuters’ list</a> of the 15 largest Islamic finance economies, with US$3.4 billion in assets.</p>
<p>But if we look at a comprehensive set of <a href="https://www.zawya.com/islamic-finance-development-indicator/">Islamic finance development indicators</a>, which assess the growth potential of Islamic finance in countries as well as their current state, Saudi Arabia does not rank as highly. This indicator measures not just existing assets, but also how the industry is governed, what research is being done and the level of corporate social responsibility. When these other factors are included, Saudi Arabia ranks ninth on the list.</p>
<h2>Courting controversy</h2>
<p>The IPO has <a href="http://uk.reuters.com/article/2014/10/14/nationl-comml-bk-ipo-islam%20idUKL6N0S93PU20141014">not been free from controversy</a> in the conservative Muslim nation. In the build-up, some clerics suggested it violated Islamic principles. Sheikh Abdullah al-Mutlaq, a member of the Council of Senior Scholars, Saudi Arabia’s highest religious body, said that subscribing to the NCB IPO was not permissible since the bank had too many dealings forbidden by Islamic law on its balance sheet. He emphasised the point by saying: “Religion comes above everything.” </p>
<p>This view was supported by a fellow council member, Sheikh Saad al-Khathlan, who said the prospectus showed NCB had a high proportion of loans based on interest payments, which are banned by Islam. NCB were forced onto the back foot and <a href="http://www.zawya.com/story/NCB_committed_to_Shariah_principles-ZAWYA20141018032236/">pledged to convert their operations</a> into a fully fledged Islamic bank within about five years. </p>
<p>They also received a boost from a former Imam of the Holy Mosque in Mecca, Sheikh Adel al-Kalbani, who compared NCB to Al Rajhi Bank, a major Islamic lender that has already listed successfully on the stock market. <a href="http://uk.reuters.com/article/2014/10/14/nationl-comml-bk-ipo-islam-idUKL6N0S93PU20141014">He tweeted</a>: “Poor citizens, they don’t know what to do – if they subscribe, they are told they don’t have faith, and if they do not, they are not patriotic.”</p>
<p>The fact is, Saudi clerics have criticised other banks in the past and religious sentiment has not prevented the development of a strong banking sector in Saudi Arabia, including some institutions which pay interest. Plus, as the initial results of the IPO show, the religious controversy did not stop NCB gaining ground and bucking a broader market slowdown.</p>
<p>As Saudi Arabia looks set to open its gates to foreign investment, this IPO marks a significant step in the country’s bid to boost investor confidence in Saudi stock exchange by attracting investment from the super wealthy in the past two weeks of its subscription. And the huge amount of money from excess subscriptions will be returned to investors and funds, meaning the rest of stocks on the Tadawul will probably receive a boost in the coming weeks.</p><img src="https://counter.theconversation.com/content/33382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis Alam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Saudi Arabia’s largest lender, National Commercial Bank (NCB) has attracted 215.8 billion riyals (US$58 billion) of bids from about 1.2m investors following its initial public offering. Despite attracting…Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/325512014-10-20T06:07:58Z2014-10-20T06:07:58ZUndervaluing Medibank Private: taxpayers face a raw deal<figure><img src="https://images.theconversation.com/files/61502/original/7c4mn2y2-1413160800.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The sale of Medibank private is unlikely to compensate taxpayers for the loss of future revenue</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>The IPO of Medibank Private is set to take place on November 25, and the indicative share price range in the <a href="https://www.medibankprivateshareoffer.com.au/document/#p=1&c=0&v=1">prospectus</a> released today suggests a market capitalisation of between A$4.3 billion and A$5.5 billion.</p>
<p>In public hands, Medibank has paid dividends of about <a href="http://www.medibank.com.au/client/documents/pdfs/mpl_annual_report_2013.pdf">A$450 million</a> to the government over the past two years.</p>
<p>There are mixed opinions on whether the privatisation of Medibank will be largely positive or negative. However, from the point of view of Australian society overall, the privatisation is a good decision financially only if the revenue from the sale compensates for the loss of future returns.</p>
<p>Assuming that dividends of A$450 million would continue in perpetuity, the most recent revenue estimates implies a discount rate of between 8.2% and 10.5%. This is a high discount rate for a relatively low-risk asset. Medibank’s status as a low-risk asset is supported by the government using both carrots (premium subsidies) and sticks (premium loadings for high income earners without private health cover) to push individuals to sign up to its services.</p>
<p>Recommended discount rates for valuing low risk public assets are usually closer to 4%. For riskier assets, like electricity, they are about 7%. Even the latter rate implies a sales price target of $6.4 billion. If the sale raises $5.5 billion, the taxpayer is still likely to lose out.</p>
<p>This should not come as a great surprise. In several past sales of government assets, the revenues gained have not been sufficient to compensate for future losses. University of Queensland Professor of Economics <a href="http://johnquiggin.com/2014/04/17/tim-nicholls-makes-a-little-progress-in-thinking-about-privatisation/">John Quiggin</a> has been a longstanding critic. </p>
<p>Governments tend to be myopic in relation to such sales. Their own short–term interests often outweigh those of the Australian community overall. Professor Bob Walker and Dr Betty Con Walker argue that <a href="http://www.smh.com.au/business/indecent-haste-to-sell-public-assets-can-cost-taxpayers-a-fortune-20111125-1nyv8.html">taxpayers often come out well behind</a> when public assets are privatised.</p>
<p>This has done nothing to dampen the positive rhetoric from the government and Medibank itself. For the government, the funds from privatising Medibank will be available immediately rather than accruing in future years and to future governments. In a tight budget setting this is clearly attractive. </p>
<p>However, the Australian Medical Association, <a href="https://www.ramsayhealth.com.au/Investor-Centre/docs/Market_Briefings_16082013.pdf">hospital groups</a> and doctors are generally <a href="http://www.canberratimes.com.au/comment/patients-the-losers-with-medibank-privatisation-20141009-10r5zc.html">against the change</a>. They fear larger private insurers will use greater market power to drive down quality in the interests of higher returns to shareholders. Another issue is the cost of health insurance for consumers.</p>
<h2>What about the impact on insurance premiums?</h2>
<p>Many commentators suggest there will be little impact on premiums arising from the sale itself. The argument relies on the regulatory environment remaining the same. One common theory is that competition from the other 33 firms in the private health insurance industry will keep premiums where they are. However, while it might look superficially like a lot of competition, in reality the market is very concentrated. </p>
<p>In 2012 the largest two insurers, Medibank Private and BUPA, had 54% of all policies. The smallest 24 health cover companies control only 8% of this market. In addition the market share of for-profit companies <a href="http://phiac.gov.au/wp-content/uploads/2013/12/PHIAC_Research_Paper_No1-new-format.pdf">increased from 0.4% in 1995 to 68.6% in 2012</a>. </p>
<p>The recent <a href="http://competitionpolicyreview.gov.au/files/2014/09/Competition-policy-review-draft-report.pdf">Competition Policy Review draft report</a> is likely have a significant impact on consumers and the sector. It recommends two significant changes to the regulation of the private health insurance industry. </p>
<p>The first is the removal of ministerial approval for annual increases in private health insurance premiums and its replacement by an unspecified “price monitoring scheme”. The second is to allow the expansion of private health insurance coverage to primary care. This would allow private insurance to cover gap payments from GP visits, specialist consultations and medical tests. </p>
<p>If these recommendations are accepted, there will be less cost control on fees and premiums. Large for-profit insurance companies will have an expanded market and even more market power. Over time the industry could become even more concentrated, although it is fast approaching the Australian Competition and Consumer Commission’s threshold for a high-concentration industry.</p>
<p>Without government oversight and regulation of premiums, the large for-profit players in the industry like Medibank and BUPA would be much more able to exercise their market power in pursuit of higher returns to shareholders. </p>
<p>The release of the Competition Policy Review draft report was timed prior to the Medibank share offer. If the market anticipates the government will accept the report’s recommendations on private health insurance, investors may be willing to pay more for Medibank Private shares. </p>
<p>Raising $4 billion from the sale may look very small with hindsight. It is worth comparing the revenue from the sale with the annual cost of the private health insurance rebate which cost the budget <a href="http://www.health.gov.au/internet/budget/publishing.nsf/Content/2014-2015_Health_PBS_sup1/$File/2014-15_Health_PBS_2.06_Outcome_6.pdf">$5.5 billion in 2013-14</a>.</p>
<p>A sale price well in excess of $4 billion would likely be heralded as a major success by the government. However, taxpayers could well be big losers from the privatisation especially if we face a deregulated health insurance market.</p><img src="https://counter.theconversation.com/content/32551/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Elizabeth Savage has received research funding from the Australian Research Council and the National Health and Medical Research Council. She has also undertaken commissioned research for the Australian Department of Health and Ageing.</span></em></p>The IPO of Medibank Private is set to take place on November 25, and the indicative share price range in the prospectus released today suggests a market capitalisation of between A$4.3 billion and A$5.5…Elizabeth Savage, Professor of Health Economics, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/319882014-09-22T14:14:17Z2014-09-22T14:14:17ZAlibaba feeding frenzy shows how little we have learnt<p>Greed is still good. Wall Street has just witnessed its largest ever stock market launch as Chinese internet giant <a href="https://theconversation.com/alibaba-investors-gamble-on-rise-of-ecosystem-internet-in-record-breaking-ipo-31807">Alibaba raised some $25 billion</a> and watched its share price rise by 35% on its first day’s trading. It says a lot about how little we have changed after the 2008 crash. We are still willing to be seduced by the perennial golden goose; still fearful of missing out; and still addicted to power, wealth and growth at any cost. </p>
<p>So if the shares saw such a spike, why did the bankers get the pricing so wrong? Effectively, the company lost over $8 billion at the launch because it <a href="http://www.ft.com/cms/s/3/cecb939e-4166-11e4-a7b3-00144feabdc0.html?siteedition=uk#axzz3E2O2MVdN">did not pitch at the right price to investors</a> from the outset. It is a similar story to the <a href="https://theconversation.com/royal-mail-row-shows-we-still-dont-understand-markets-26027">sale of Royal Mail shares</a> in the UK, though without the political fallout. The sad reality is that finance theory knows little about the fundamental value of a company as it all depends on future expectations which are uncertain and unpredictable. Even the best financial institutions could not price the shares “correctly”. The Financial Times believes the share issue was wildly over-priced and says that <a href="http://www.ft.com/cms/s/0/29d31b02-3fe8-11e4-936b-00144feabdc0.html#axzz3E1aUIug6">only with hindsight</a> will we know whether the market is pricing US equities correctly. </p>
<p>The FT has also expressed concern that a lot of investment is happening through hedge funds and funded with borrowed money. The bets are being placed with money from the banks which means the repercussions can be systemic if prices fall. </p>
<h2>Beauty parade</h2>
<p>Prior to the sale of the shares, millions were spent on a <a href="http://www.ft.com/cms/s/0/19399804-417b-11e4-a7b3-00144feabdc0.html#slide0">big public relations exercise</a> to boost the profile of Alibaba. Its founder Jack Ma had to go around the world to persuade potential investors about the future prospects of the company, and reassure them about the fact that the new shares do not give voting rights or direct ownership of the company. He argued that the legal structure is robust and reliable, but the legal structure is frankly complex, and the rights it gives shareholders not precisely clear. Room for doubt then you might say, and yet billions poured into the company. </p>
<p>The finance textbooks have little to say about the value of public relations and marketing when share prices are set. In fact, theory predicts that in an efficient and perfect world, it is a waste of money as investors and markets are smart enough to figure out the truth for themselves. Alibaba and its bankers clearly thought that theory was worth ignoring: millions were spent, the launch was seen as a huge success, and credit given to Jack Ma. It was a clever stage show.</p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=420&fit=crop&dpr=1 600w, https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=420&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=420&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=528&fit=crop&dpr=1 754w, https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=528&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/59712/original/f2b86bnf-1411389690.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=528&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Alibaba: There’s the rub.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/micke_nordin/6971947491/in/photolist-bC646e-6v7Bx-9n5jqB-63JCm6-EExYs-fs8K1H-dfgr5i-7Fy3z-dDB4qS-gFRVf-9fWnug-8RqGgd-7fMnT8-7fRjmu-9fZtWA-6qnFQa-9fWnax-9fWnke-9fWnZi-9fZuf1-9fZtLY-9fWoi8">Micke Nordin</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The fact that all this is happening right in front of our eyes – and allowed to happen – shows how out of control modern finance has become. Prices are based on expectations, and expectations of expectations. It also shows how willing many people are to cast their values aside for a share of the rollercoaster fortune, no matter how it is made, by whom or with what wider and longer-term repercussions for society. Just as Aladdin unleashed a genie from his lamp, it seems with Alibaba we have unleashed a genie out of global control, but with huge global power and influence. The market has said <em>Open Sesame</em>, without fully caring for the consequences. All most of us can do is to sit and watch, and be ready to bail out this gambling machine if it all turns sour. We are all participants in the feeding frenzy, whether or not we eat. Society is once again taking <a href="https://theconversation.com/financial-literacy-is-shockingly-low-and-the-academy-must-do-more-31321">involuntary risks</a> through financial markets, and we have already experienced the human consequences of this madness many times.</p>
<h2>All gain no pain</h2>
<p>We should also question the fundamental ethics and values of those investors and institutions so keen to make a quick return for no effort at all. When people put effort into their jobs or business, and it grows, they can experience the joy of achieving something, learning and enhancing their skills in the process, and sharing the rewards with their colleagues or stakeholders. </p>
<p>I fail to see human sacrifice in earning a quick buck on Alibaba shares, nor any interest in the fundamental ethics of the company or its practices. It is classed as a combination of Amazon and eBay in the world’s fastest-growing economy. It is a middle-man – not a manufacturer or farmer, but a supplier with huge selling power and reach. Jack Ma thanked the investors for their “trust” in Alibaba after the successful launch. <a href="http://www.theguardian.com/business/2014/sep/18/alibaba-and-the-40-facts-ipo">The Guardian </a> reports that Ma’s letter to staff the day after the IPO signalled the firm would “adhere to the principle of ‘customers first, employees second, shareholders third’.” </p>
<p>The report also notes criticism that Alibaba sites are a magnet for sellers of fake goods, even though the company says it spend millions rooting them out. <a href="https://theconversation.com/bankers-should-look-eastwards-for-ethical-guidance-27747">Ethics</a> seem very far from the way modern powerful businesses act and behave. Contradiction is rampant.</p>
<p>When investors are on a rollercoaster, the only thing they pray for is that they can profit from the ride, and get off just in time. No trust is involved here. Initially <a href="http://www.ft.com/cms/s/3/cecb939e-4166-11e4-a7b3-00144feabdc0.html?siteedition=uk#axzz3E2O2MVdN">there is a fear of missing out, and later there is a fear of staying involved</a> according to the Financial Times. The common by-word is <em>fear</em>. We are afraid to not make money, and afraid of losing it once we have made it. That fear imprints on our psyche, and lasts longer than the profit we have made from the bubble. </p>
<p>The investors who piled into Alibaba are not so different from the rest of us. Financial fear ruins the lives of so many ordinary people and I wonder how much modern finance contributes to depression and mental illness? The <a href="https://theconversation.com/its-time-to-put-social-impact-of-finance-on-the-curriculum-21930">Tax Justice Network </a> have shown that is indeed a curse on society. Instead of being its servant, it has become our master. They are not far from the truth. Perhaps if financial markets would scale back the bets based on smoke and mirrors, fear and greed, then we might be able to learn to trust one another for real.</p><img src="https://counter.theconversation.com/content/31988/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Atul Shah does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations.</span></em></p>Greed is still good. Wall Street has just witnessed its largest ever stock market launch as Chinese internet giant Alibaba raised some $25 billion and watched its share price rise by 35% on its first day’s…Atul K. Shah, Senior Lecturer - Accounting & Finance, University of SuffolkLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318072014-09-19T12:07:56Z2014-09-19T12:07:56ZAlibaba investors gamble on rise of ‘ecosystem internet’ in record breaking IPO<p>Alibaba shares will start trading on the New York Stock Exchange in a <a href="http://www.theguardian.com/business/2014/sep/18/alibaba-investor-ipo-sell-shares-lockup-flotation">record-breaking initial public offering</a>(IPO) which could end up raising US$25 billion. Investors have bought into a new kind of internet company – an ecosystem more than a service – which came out of a frenetic battle between emerging Chinese internet giants. Their gamble is that CEO Jack Ma can make an Asian ecosystem work in the West.</p>
<p>As the largest internet company in China, it will become the 8th most valuable technology company in the world, behind the likes of Apple, Google, Microsoft, Facebook and IBM. And, with annual growth rates of more than 30%, the gap between Chinese companies such as Alibaba and <a href="http://www.forbes.com/sites/chriswright/2014/09/16/tencent-the-alibaba-thats-already-listed/">Tencent</a> and their Western counterparts is getting closer. In fact, with Alibaba’s listing, Chinese internet companies share the top four spots equally with the US in terms of their market value. In descending order, these are: Google, Alibaba, Tencent and Amazon. </p>
<p>The strong performance and rapid rise of China’s tech firms may shock some – outside of China, Alibaba is not a household name like Amazon or Google. But, with hundreds of millions of users hosting millions of merchants and businessmen, Alibaba handles more business than any other e-commerce company. It is, of course, China’s enormous and fast growing domestic market that has spurred the rise of these tech companies to service their needs.</p>
<h2>Fast moving innovator</h2>
<p>But there is more: the competition in this domestic market among Chinese companies as well as with other multinationals is extremely fierce. Successful private companies like Alibaba have to be highly entrepreneurial and customer-oriented to survive, let alone thrive. For example, Alibaba recently introduced <a href="http://online.wsj.com/articles/alibabas-alipay-treasure-is-hard-to-tally-heard-on-the-street-1410861146">online payment platform Alipay Wallet</a> and taxi-calling features in an attempt to compete with rival Tencent’s highly successful WeChat.</p>
<p>There is little doubt that Alibaba is a fast moving innovator in the world of e-commerce. It has created its own model by constantly adding and integrating new functions and features, driven by the needs of its customers and the desire to offer them something that competitors such as Tencent, Baidu and eBay do not have. </p>
<p>In terms of the value proposition and business model, Alibaba differs from its Western counterparts. Take Google and Amazon – they both specialise in one area: Google aims to be the best search engine and Amazon the best online retail store. The way that they have positioned themselves in terms of the market reflects the game they played when they first opened up shop. This was to compete with bricks and mortar companies such as Walmart. </p>
<p>Alibaba is part of the next generation of internet companies. It is first and foremost focused on creating online ecosystems rather than specialising in a niche service. Its main focus is to create new services for customers who have been brought up in and who are highly versed in the world of the internet.</p>
<h2>From East to West</h2>
<p>A big question though for Alibaba is whether the innovative capabilities and competences that it developed in a Chinese environment will be transferable to the West. The ability to understand customers intimately and continuously innovate is transferable in principle, but will need significant adjustment before it can become a truly global player like Google and Amazon. </p>
<p>The needs of customers in the West may be very different to those in China, and so the innovative features they have successfully introduced there may not float the boats of Western consumers. Alibaba may also lack the closely knit business network and institutional support that would be critical for the company to create an online ecosystem outside of China. However, these are not insurmountable problems, and their expansion overseas is more likely to start in emerging markets such as Africa and Asia, where Alibaba is much more recognised and admired, than in Europe and North America. </p>
<p>If Alibaba’s Jack Ma can navigate a route to reach Western markets successfully, then there will be others in China waiting to ride in his wake. Competition among Chinese companies in the tech sector is very strong. It comprises some well known names such as Lenovo, Huawei, Baidu and Tencent, as well as some promising newcomers like DJI and Xiaomi. Their battling rivalry has given them the motivation and tools to innovate and promote themselves in a way that gives them a foothold to compete in the global market. And it means that China will continue to chip away at US dominance in the world technology sector.</p><img src="https://counter.theconversation.com/content/31807/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Qing Wang does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Alibaba shares will start trading on the New York Stock Exchange in a record-breaking initial public offering(IPO) which could end up raising US$25 billion. Investors have bought into a new kind of internet…Qing Wang, Professor of Marketing and Innovation, Director, Marketing Innovation and The Chinese and Emerging Economies (MICEE) Network, Warwick Business School, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/318702014-09-19T11:53:57Z2014-09-19T11:53:57ZIt’s no bubble: insane dotcom valuations reveal how integral tech is to our lives<p>A recent flurry of business mergers and acquisitions and stock market flotations in the US has prompted some financial commentators <a href="http://qz.com/265782/who-will-get-hurt-if-a-tech-bubble-pops-vcs-and-employees/">to predict a new tech bubble</a>. </p>
<p>The size of these buyouts and IPOs, and the businesses themselves, are so large they are almost beyond comprehension. The recent announcements about <a href="http://www.usatoday.com/story/tech/columnist/shinal/2014/09/15/alibaba-ipo-retail-investors-beware/15676371">Alibaba</a> and <a href="https://theconversation.com/the-10-billion-japanese-app-bringing-candy-crush-tactics-to-messaging-29354">Line</a> have had financial analysts in North America, Australia and Europe scratching their heads; the estimated values of their offerings are US$20 billion and US$10 billion respectively, for products that are relatively unknown beyond Asia. </p>
<p>Combined with a general lack of public knowledge about the biggest emerging techs and the various analyses by traders and advisers, the danger of a tech bubble bursting looks all too real. But a closer look would suggest a different, more continuous kind of boom.</p>
<h2>Huge price tags</h2>
<p>Despite the rhetoric of technology commentators about how the internet <a href="http://www.oecd.org/forum/about/Idea-Factory-2014-The-Future-of-the-Internet.pdf">breaks down boundaries</a>, the prospect of an Asian business eclipsing the stock market listings of Facebook or Visa to become the biggest ever still seems daunting to some. But the potential is also enormous. Alibaba has <a href="http://www.forbes.com/sites/quora/2014/05/08/how-did-alibaba-capture-80-of-chinese-e-commerce">captured 80% of China’s e-commerce market</a>, now larger even than that in the US, as well as 10% of all retail in China. But with only 40% of the Chinese population online, the potential for even further growth is very real.</p>
<p>At the same time, the portable virtual reality system Oculus Rift was bought by Facebook for US$2 billion, even though the consumer release date <a href="http://www.franchiseherald.com/articles/6830/20140916/oculus-rift-consumer-version-release-date.htm">is still unclear</a> and will likely come with a price tag of around US$500. This is a financially quantifiable step up from the original US$2.5m raised through their original Kickstarter campaign, which originally had a <a href="http://www.wired.com/2014/05/oculus-rift-4">very modest US$250,000 target</a>. </p>
<p>In a similar move the open-world, sandbox construction game Minecraft was <a href="http://www.theguardian.com/technology/2014/sep/15/microsoft-buys-minecraft-creator-mojang-for-25bn">bought by Microsoft for US$2.5 billion</a>. However, the deal does not bring with it key company personnel, including founder and original author Markus “Notch” Persson. He and the co-founders of the company will <a href="http://www.forbes.com/sites/samanthasharf/2014/09/15/microsoft-to-buy-minecraft-maker-mojang-for-2-5-billion">now pursue other projects</a>. </p>
<p>The self-destructing video and image messaging app SnapChat has been <a href="http://blogs.marketwatch.com/thetell/2014/08/27/snapchat-worth-10-billion-start-up-valuations-stoke-bubble-fears">valued at US$10 billion</a>. Despite the uncertain business model, the 700m images and videos the company claims it sends each day must offer some promise of a return, investors believe, despite the fact the service is free and without adverts.</p>
<h2>High is the new normal</h2>
<p>Looking at these figures it is easy to push comparisons <a href="http://www.youtube.com/watch?v=bUwu5CiESbc">with the tech bubble of 1999</a>, claim over-valuation and the degree to which each of these individual listings and company purchases represent <a href="http://www.theguardian.com/technology/2014/sep/16/tech-bubble-warning-investors-dotcom-losing-money">high levels of financial risk</a>. But 14 years on from the dotcom crash the world has shifted significantly. The wreckage of individual dotcom failures is set against a technology-driven daily experience for an increasing many for whom “<a href="http://www.theguardian.com/technology/2013/aug/23/tech-giants-data">data is the new oil</a>” (although even this claim <a href="http://blogs.hbr.org/2012/11/data-humans-and-the-new-oil/">has been disputed</a>). It is claimed that e-commerce has reached sufficient scale and market penetration that it is <a href="http://www.voice-online.co.uk/article/online-shopping-killing-high-street">killing off the high street</a>. </p>
<p>In short, this is not 1999. We are part of a world that is internet-based and has been experiencing a technology boom since the dotcom crash. Proof of this different world can be seen with Facebook’s listing on the NASDAQ in 2012 which was <a href="http://money.cnn.com/2012/05/23/technology/facebook-ipo-what-went-wrong">initially criticised</a>, but at an estimated valuation of US$184 billion can be seen now as a step in the company’s step into becoming a permanent <a href="http://www.usatoday.com/story/tech/columnist/shinal/2014/03/13/facebook-cracks-market-valuation-oracle-google-apple-microsoft/6343009">tech behemoth</a>.</p>
<p>The threat of a new dotcom bubble does not come from the fact that these very large numbers are all attached to technology businesses. Technology should represent the point of reassurance. What is questionable are the business models that have developed around funding technology startups, with <a href="http://www.techradar.com/news/world-of-tech/management/raising-funds-for-a-tech-startup-what-you-need-to-know-1249294">heavy use of equity funding</a>. </p>
<p>Even more concerning are the <a href="http://www.techrepublic.com/article/the-dark-side-of-venture-capital-five-things-startups-need-to-know">expectations of failure</a> in the culture of funding technology startups. Individual investors with limited resources, who can only afford to invest in one business, face making a difficult, best guess. For the equity funds seeking out the new Google – or a product that Google will later buy – investing in multiple startups can be compared to spread-betting to lower risk.</p>
<p>For those of us without access to large bundles of cash (that we are also prepared to lose) much of the excitement of supporting new technology can be gained through crowdfunding websites that offer the <a href="https://theconversation.com/kickstarter-is-turning-into-ebay-as-shoppers-play-investors-29798">promise of something tangible</a> at the end of the process. We do need the speculative market of technology startups to drive the development of new features on our phones, tablets and desktops. And for every individual failure, like a hydra, two more innovations will appear in the continuous boom of this digital era of data.</p><img src="https://counter.theconversation.com/content/31870/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Gordon Fletcher previously received funding from InnovateUK.</span></em></p>A recent flurry of business mergers and acquisitions and stock market flotations in the US has prompted some financial commentators to predict a new tech bubble. The size of these buyouts and IPOs, and…Gordon Fletcher, Centre for Digital Business, University of SalfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/264072014-05-08T09:41:42Z2014-05-08T09:41:42ZAlibaba’s IPO signals a fresh appetite for Chinese technology<p>The planned stock market listing of Chinese e-commerce giant Alibaba in New York is a landmark deal for several reasons. The listing is anticipated to become <a href="http://dealbook.nytimes.com/2014/05/06/alibaba-files-to-go-public-in-the-u-s/">the largest in the US since Facebook’s issue in 2012</a>, and there are some key signals it sends about markets and investor sentiment.</p>
<p>The company, which operates both an eBay-style marketplace and business-to-business platform Alibaba.com, has been here before. Alibaba.com went public in Hong Kong in November 2007 and its shares remained listed there until the company went private again in September 2012. This time around, Alibaba’s entrepreneur founder <a href="http://topics.wsj.com/person/M/jack-ma/6347">Jack Ma</a> has shunned Asia for the bright lights of the Big Apple.</p>
<p>The group <a href="http://blogs.wsj.com/moneybeat/2014/05/06/alibabas-ipo-filing-everything-you-need-to-know/">filed for an initial public offering (IPO) this week</a>, setting in train a process which should see the shares start trading on the New York Stock Exchange or the Nasdaq Global Market in the form of American Depositary Shares. </p>
<p>Alibaba Group is not the first successful Chinese online business grabbed by US exchanges. Past examples include <a href="http://uk.reuters.com/article/2011/05/04/us-renren-ipo-idUSTRE7433HI20110504">Renren (the Facebook of China)</a>, <a href="http://www.ft.com/cms/s/0/4ecc199e-c5af-11e3-a7d4-00144feabdc0.html#axzz313a9visa">Weibo (the Twitter of China)</a>, and <a href="http://www.marketwatch.com/story/baidu-ipo-jumps-354-into-the-record-books">Baidu (the Google of China)</a>, all of which shunned Chinese stock markets and the Hong Kong Stock Exchange. The case of Alibaba Group is particularly dramatic for Hong Kong, as the company was initially planning to list there. </p>
<p>So the decision offers further evidence of structural problems with Asian IPO markets, and it also signals a fresh appetite for Chinese offerings in the US – or at least among the bankers preparing to sell the stock to investors.</p>
<h2>Dot-com Bubble to Social Media Wave</h2>
<p>It has been a rocky road for investors in technology stocks. During 1999 and the early months of 2000, it looked as if appetite was insatiable. The frenzy led to unrealistically high valuations; some companies profited by simply <a href="http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00408/abstract">adding the .com suffix to their names</a>, even if their business had little to do with the internet. Of course, the bubble eventually burst with a sharp correction in prices and the thirst for internet stocks swiftly dried up.</p>
<p>It took a long time before internet firms regained the market’s trust. <a href="http://blogs.wsj.com/moneybeat/2013/08/19/googles-ipo-nine-years-later-only-nine-stocks-beat-it/">Google’s successful IPO in 2004</a> was an important step in this respect. Then came the IPO wave of social media firms. <a href="http://www.bloomberg.com/news/2011-05-18/linkedin-raises-352-8-million-in-ipo-as-shares-priced-at-top-end-of-range.html">Linkedin</a>, <a href="http://www.reuters.com/article/2011/11/04/us-groupon-idUSTRE7A352020111104">Groupon</a>, and <a href="http://online.wsj.com/news/articles/SB10001424052970204466004577102371445084982">Zynga</a> went public one after the other in 2011. <a href="http://www.bbc.co.uk/news/business-18141990">Facebook</a> made its debut in 2012. <a href="http://money.cnn.com/2013/11/07/technology/social/twitter-ipo-stock/">Twitter</a> followed in 2013. <a href="http://uk.reuters.com/article/2011/05/11/us-jiayuan-ipo-debut-idUSTRE74A5XM20110511">Jiayuan.com</a> and <a href="http://online.wsj.com/news/articles/SB10001424053111903480904576513133655907232">Tudou Holdings</a> joined their Chinese internet peers that went public in the US during this wave.</p>
<p>The market is more cautious these days in terms of valuing internet stocks, as can be seen in the less-than-frothy debuts of some of those above. The dotcom bubble and the bear market that followed are still painful memories for US investors. There is less hype about internet stocks and the market reacts efficiently when it feels a valuation is too high, as was the case with Facebook. It means that demand for internet stocks in the US seems less flaky and more likely to be sustained this time around.</p>
<p>It is also a relatively good time for Chinese firms to turn to US markets. <a href="http://www.reuters.com/article/2011/06/24/us-china-accounting-idUSTRE75N19J20110624">Accounting scandals concerning Chinese firms</a> that listed shares in the US dented the enthusiasm for new listings in 2011 and 2012. However, these scandals mainly involved Chinese firms that took a shortcut to a US listing by engaging in a reverse merger – sometimes known as a <a href="http://www.investopedia.com/terms/b/backdoorlisting.asp">backdoor IPO</a> – and not those that took the normal route. Recently, <a href="http://online.wsj.com/news/articles/SB10001424052702303843104579167632835494614">Chinese issuers are returning to the US IPO market</a>, which suggest a regained confidence in China’s growth story.</p>
<p>It all means this should be a comfortable moment for Alibaba to go public in the US.</p>
<h2>Keeping control</h2>
<p>And that means ChiNext, China’s version of the Nasdaq exchange, and the HKSE are losing yet another major Chinese tech firm to the US exchanges. </p>
<p><a href="https://theconversation.com/chinas-nasdaq-fails-to-get-off-the-ground-as-venture-capitalists-look-to-the-us-24170">My colleagues and I have found</a> that <a href="http://www.sciencedirect.com/science/article/pii/S1057521914000337">ChiNext is not yet ready</a> to attract firms of the calibre of Alibaba Group. For the Hong Kong Stock Exchange, however, Alibaba slipped through their fingers.</p>
<p>The US IPOs of Baidu, Renren and Weibo had a common feature that explains much. All of these companies issued class A shares with inferior voting rights compared to the class B shares held by pre-IPO owners. In each case, class A shares are entitled to a single vote, whereas class B ones are entitled to ten votes in the cases of Baidu and Renren and three votes in the case of Weibo. This dual-class share structure is quite common in the US and, crucially, allows insiders to retain control after taking their firms public.</p>
<p>Hong Kong Stock Exchange rules do not allow for different classes of shares. And although there are merits in the “one share, one vote” principle, at a practical level, it is one of the key reasons why US exchanges are managing to grab successful Chinese tech businesses.</p>
<p>Alibaba’s listing is set to be a landmark whatever the outcome. A positive reception by the market will reinforce a recovery in the US IPO market which has rallied from its dismal state in the heart of the financial crisis. On the other hand, while a negative reaction would dent momentum, the market seems more resilient at present and confidence more established. And of course, a negative reaction might offer some succour to the spurned Asian exchanges if Chinese tech firms think twice before they turn their backs again.</p><img src="https://counter.theconversation.com/content/26407/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ufuk Gucbilmez does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The planned stock market listing of Chinese e-commerce giant Alibaba in New York is a landmark deal for several reasons. The listing is anticipated to become the largest in the US since Facebook’s issue…Ufuk Gucbilmez, Lecturer in Accounting & Finance, The University of EdinburghLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/263722014-05-08T03:29:56Z2014-05-08T03:29:56ZChina’s Alibaba cries ‘open sesame’ to US market<figure><img src="https://images.theconversation.com/files/48006/original/hjz3jnf7-1399507486.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">English teacher Jack Ma founded Alibaba 15 years ago.</span> <span class="attribution"><span class="source">World Economic Forum/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>The upcoming <a href="http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm">IPO</a> of Chinese e-commerce giant Alibaba is likely to be the biggest the US market has seen. At an expected US$20 to $25 billion, it would be one and a half times bigger than Facebook’s IPO which raised US$16 billion.</p>
<p>The Alibaba group conists of a number of companies that roughly cover the same businesses as Amazon and eBay combined. Its <a href="http://blogs.wsj.com/moneybeat/2014/05/06/alibabas-ipo-filing-everything-you-need-to-know/">revenue</a> last year was around US$240 billion - about three times the size of eBay and twice that of Amazon. In 2013, it made US$2.5 billion net income off $6.5 billion in revenue. The success of Alibaba reflects the huge opportunities that China’s large population combined with poor physical commercial infrastructure offers to internet commerce.</p>
<p>Given the penetration of mobile phones in the Chinese market, it is not surprising that Alibaba has been especially successful in the mobile space. Alibaba’s mobile <a href="http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm">sales</a> account for 15% of total revenues and are responsible for 76% of all mobile commerce in China. Nearly 20% of Alibaba’s payment transactions through Alipay (the equivalent of PayPal) are done through mobiles.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=806&fit=crop&dpr=1 600w, https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=806&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=806&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1013&fit=crop&dpr=1 754w, https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1013&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/47976/original/rw73c2rs-1399465360.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1013&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Alibaba Corporate Structure.</span>
</figcaption>
</figure>
<h2>Alibaba’s origins</h2>
<p>Alibaba was founded 15 years ago by english teacher Jack Ma. It is structured in a complex arrangement of companies that are registered in the Cayman Islands. Despite having an english site <a href="http://aliexpress.com">aliexpress.com</a> catering for the global market, it is little known outside of China. What is more widely known, however, is that in 2005 Yahoo co-founder Jerry Yang invested US$1 billion for a 40% stake in the company. Yahoo <a href="http://blogs.wsj.com/moneybeat/2014/05/06/alibabas-ipo-filing-everything-you-need-to-know/">still owns</a> 23%, which after the IPO could be worth about US$13 billion. </p>
<p>When Yahoo sold Alibaba shares in 2012, netting itself US$7 billion, it became <a href="http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm">obliged</a> to sell Alibaba another 208 million shares which would bring down its stake in Alibaba to about 14%.</p>
<h2>IPO possibilities</h2>
<p>The most intriguing question the IPO throws up is what the company will do with the money it raises. Investors at least will be expecting the company to continue to develop the enormous market in China, but will also be anticipating an expansion into the US. This could pose a significant problem for companies like Amazon and eBay. Non-Chinese consumers may take a little time to accept the Chinese company, but the US market listing will certainly help.</p>
<p>Like Amazon, Alibaba runs a <a href="http://aliyun.com/">cloud services business</a> which in many ways is a cheaper alternative to Amazon Web Services. Western businesses are unlikely to want to put corporate data on computers in China, and so Alibaba’s growth of this business will depend on it setting up data centres in other countries and it isn’t clear whether this is something it’s interested in doing.</p>
<p>Another question post-IPO is what Yahoo will do with its investment and possibly more pertinent, what Alibaba will do with Yahoo. Despite Yahoo’s general improvement in its performance, it is still seen as a company with an unclear future. The recent increase in Yahoo’s share price has been largely attributed to speculation around Alibaba’s listing and so once that happens, investors are expecting some sort of payoff from the money generated by the IPO. Yahoo CEO Marissa Mayer has not said what she intends to do with the remaining stake in Alibaba.</p>
<p>The other big foreign Alibaba investor is the Japanese tech company Softbank (owner of US mobile company Sprint) which owns 34.4% of Alibaba. Softbank CEO Masayoshi Son has <a href="http://www.reuters.com/article/2014/05/07/us-softbank-results-idUSBREA4608F20140507">said</a> the company doesn’t intend to sell the shares, seeing itself in a strategic partnership. Given Softbank’s current attempts to buy another US mobile carrier, T-mobile, the combination of two predatory tech companies in the ascendancy in the US doesn’t bode particularly well for US companies in their path.</p>
<h2>What the IPO will reveal</h2>
<p>Stock market listings serve one important function and that is to bring public transparency to the way businesses operate and have been operating. Not only will this information lead to a greater understanding of what sort of company Alibaba is and what its prospects are, it will also serve to establish a new relationship with consumers in other countries, especially the US. Investors and consumers may also obtain a greater insight into a country that <a href="http://www.census.gov/foreign-trade/statistics/highlights/top/top1403yr.html">supplies</a> the US with 25% of its total imports.</p>
<p>In the <a href="http://www.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm">original story</a> of Ali Baba and the Forty Thieves, Ali Baba is the only person left knowing the secret to the thieves’ cave of riches. The company Alibaba is probably hoping this story is about to come to pass in its future. </p><img src="https://counter.theconversation.com/content/26372/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>David Glance does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The upcoming IPO of Chinese e-commerce giant Alibaba is likely to be the biggest the US market has seen. At an expected US$20 to $25 billion, it would be one and a half times bigger than Facebook’s IPO…David Glance, Director of Innovation, Faculty of Arts, Director of Centre for Software Practice, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/260272014-04-29T11:32:42Z2014-04-29T11:32:42ZRoyal Mail row shows we still don’t understand markets<p>Business secretary Vince Cable and the boss of the City is facing questions from parliamentary committees this week over the much-maligned sale of a stake in Royal Mail. So will we finally have a definitive answer to whether a national treasure was sold on the cheap? </p>
<p>Armed with the <a href="http://www.nao.org.uk/wp-content/uploads/2014/04/The-privatisation-of-royal-mail.pdf">National Audit Office’s report</a> that suggests the privatisation could have raised an additional £750m for the taxpayer, the committees are quizzing those involved – including <a href="http://www.theguardian.com/politics/blog/2014/apr/29/vince-cable-questioned-by-mps-about-royal-mail-privatisation-politics-live-blog">Cable</a>, bankers from Lazard, UBS and Goldman Sachs, and <a href="http://www.theguardian.com/business/2014/apr/28/martin-wheatley-fca-nothing-unusual-royal-mail-share-price-jump">Martin Wheatley, the chief executive of the FCA regulator</a>.</p>
<p>It is an easy target to aim at for those who say Royal Mail was sold too cheaply. They can simply point to the stratospheric price rise immediately after the shares were sold to the public and institutions. Within days the price hit 615p, an 86% premium to the issue price of 330p. But hindsight is a marvellous thing, and it is easy to be critical after the event. </p>
<p>Markets are fundamentally hard to predict and that means a premium is almost inevitable. To make an share attractive to investors and ensure a successful sale, the issue price will always be a discount to the full value. In this particular case, it also worth remembering that by retaining a minority stake of 30%, the government will benefit from any increase in share price when it disposes of that investment.</p>
<h2>Post apocalyspse?</h2>
<p>On the other hand, those who say the issue was fairly priced point to the uniqueness and complexity of the business, its ongoing and incomplete turnaround, its <a href="http://www.royalmailgroup.com/about-us/regulation/how-were-regulated/universal-service-obligation">Universal Service Obligation</a>, the need for further substantial across-the-board modernisation and productivity improvements, the inexorable decline in letter volumes, the increasing threat of competition from companies such as Deutsche Post (DHL in the UK), TNT, FedEx, UK Mail in the key parcels business and the possibility of strike action. </p>
<p>Investors may have been able to shove these issues to one side in the rush to buy shares, but as we know, investors can be irrational. There has been a new, albeit challenging, three-year pay and productivity/modernisation deal with the unions, but the problems haven’t gone away. </p>
<p><a href="http://www.royalmailgroup.com/sites/default/files/RMG9MIMS240114.pdf">January’s trading statement</a> was relatively upbeat. It showed a continuing reduction in letter volumes and revenues being offset by revenue improvement in the parcels operations although volumes were flat, but there is now more caution amongst investors who appear to have become less bullish about Royal Mail’s future.</p>
<p>The share price has recently fallen to around 520p, still a 58% premium to the issue price, suggesting markets have blown off some, but not all, of the “froth” that Vince Cable thought was in the post-privatisation price. Recent talk of union action in response to Royal Mail’s decision to remove 1,600 management posts has also weighed negatively on the share price and might raise some concerns over the company’s ability to deliver improvements. More scepticism might be round the corner as The Royal Mail’s annual results are due to be published in May and investors will get a better look at where the business stands.</p>
<h2>Lessons for Lloyds</h2>
<p>Whatever the prospects for the Royal Mail, though, any stock market valuation is a notoriously difficult exercise. It is heavily dependent on the quantity and quality of information available, assumptions about the inherently uncertain future and investors’ attitude to risk. </p>
<p>In this case, the government and its lead advisors were in possession of all the necessary information but their assumptions were conservative. In arriving at their £3.3bn valuation – about £6bn below <a href="http://news.sky.com/story/1159110/royal-mail-undervalued-by-up-to-6bn">the most optimistic estimates</a> – they showed an aversion to risk by attaching significant credence to the potential for future problems at Royal Mail. </p>
<p>They were also determined that the sale should be a success and fearful that an optimistic pricing could dissuade potential long-term holders of the stock. In fact, it turns out that the big investment managers actually went into the market to <a href="http://www.nao.org.uk/wp-content/uploads/2014/04/The-privatisation-of-royal-mail.pdf">buy up more stock after the IPO was completed</a>, with this compounded by the stock’s later inclusion in the FTSE100 index. The move onto the <a href="http://www.londonstockexchange.com/exchange/prices-and-markets/stocks/indices/summary/summary-indices-constituents.html?index=UKX">blue chip index</a> forced the big index tracker funds to load up on shares, and which further sustained the price.</p>
<p>It is beyond doubt that the government erred on the side of caution in setting the Royal Mail as it sought to ensure the privatisation’s success. It also was trying to transfer to the private sector a business that successive governments had wanted to privatise and that had been problematic for decades; the incentive was there to give it better access to the kind of investment funding needed to further modernise and prosper.</p>
<p>Talking in binary terms about over-valuations and under-valuations belies a misunderstanding of how the markets work, but there are lessons to be learned from this saga. We should learn the importance of taking a more balanced view of valuation and considering different more flexible pricing mechanisms. For example, there should be a stronger link between the strength of investor demand and the issue price. Happily, with Lloyds Banking Group being readied for a <a href="http://www.theguardian.com/business/2014/apr/04/lloyds-banking-group-sell-taxpayers-bank-shareholders">significant public share issue</a>, the government may soon have an opportunity show us exactly what has been learned.</p><img src="https://counter.theconversation.com/content/26027/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Paul Simmonds does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Business secretary Vince Cable and the boss of the City is facing questions from parliamentary committees this week over the much-maligned sale of a stake in Royal Mail. So will we finally have a definitive…Paul Simmonds, Senior Teaching Fellow, Strategy & International Business, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.