tag:theconversation.com,2011:/us/topics/ipo-35219/articlesIpo – The Conversation2021-10-07T10:40:28Ztag:theconversation.com,2011:article/1690672021-10-07T10:40:28Z2021-10-07T10:40:28ZStock market: many companies are choosing not to be listed – here’s why<figure><img src="https://images.theconversation.com/files/425072/original/file-20211006-16-1faatuv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">All the bull can be a lot to bear. </span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-watching-bull-bear-concept-stock-297104294">Bacho</a></span></figcaption></figure><p>Stock markets reached <a href="https://tradingeconomics.com/united-states/stock-market#:%7E:text=Historically%2C%20the%20United%20States%20Stock,updated%20on%20October%20of%202021.">all-time highs</a> in 2021, bringing huge value to the companies riding the wave, even when you allow for the dip in recent weeks. We are also in the midst of a <a href="https://www.cnbc.com/2021/07/26/ipos-are-on-track-for-a-record-year-as-companies-cash-in-on-sky-high-stock-prices.html">boom year</a> for flotations, with many boards taking advantage of investor enthusiasm for shares. Yet companies have been delisting from the stock market in even <a href="https://www.investors.com/news/publicly-traded-companies-fewer-winners-huge-despite-stock-market-trend/">larger numbers</a>, and, in fact, this trend has been going on for some time. </p>
<p>The number of listed companies worldwide peaked at 45,743 in 2014 but had slipped to 43,248 by 2019 <a href="https://data.worldbank.org/indicator/CM.MKT.LDOM.NO">according to</a> the World Bank. The numbers in major markets such as the US, UK, France and Germany have all been trending down. </p>
<p><a href="https://citywireusa.com/professional-buyer/news/investors-expect-more-listed-companies-to-go-private-in-2021/a1440407">In 2020</a>, there were 47 deals to take companies private worth a total of US$40 billion (£29 billion), which was well down from the 62 deals worth US$88 billion in 2019, though the numbers were considerably up in Asia. On the other hand, 2021 has been a huge year: going private is already beyond its previous peak from 2007, with a record number of transactions that has already <a href="https://www.ft.com/content/5c1e4817-0a42-4de5-a281-baad2149a40f">surpassed US$800 billion</a>. </p>
<p><strong>Total listed companies worldwide</strong></p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Graph showing the number of listed companies worldwide over time" src="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/424731/original/file-20211005-27-i9tpc5.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><a class="source" href="https://data.worldbank.org/indicator/CM.MKT.LDOM.NO">World Bank</a></span>
</figcaption>
</figure>
<p>Some of these decisions to go private are being driven by aggressive buying by private equity groups such as Blackstone, KKR and Apollo. In the belief that there are corporate bargains in the wake of the pandemic and Brexit, these investment firms did <a href="https://www.jdsupra.com/legalnews/private-equity-firms-hunt-for-value-in-9564289/">US$113.5 billion worth</a> of deals in the first half of 2021 alone. That’s more than double the previous six months and the strongest half year since the first half of 2007. </p>
<p>Yet the lure of private equity is not the only explanation for companies walking away from the stock market. So what’s going on, and are they doing the right thing?</p>
<h2>The big turn-off</h2>
<p>For one thing, there is enough money to be found elsewhere that companies don’t need to raise funds through a flotation. The world’s central banks have been increasing the money supply by slashing interest rates and “printing money” via quantitative easing (QE) since the financial crisis of 2007-09, but the latest round of QE in response to the pandemic has taken this to a whole new level. The current rate of money-supply expansion is <a href="https://wolfstreet.com/2021/07/17/too-much-money-chasing-too-few-goods-and-services/">faster than</a> the growth <a href="https://www.ft.com/content/3e45991a-ce3a-4cda-b439-1c18f74ad0c5">of economies</a>. With lending rates so low, all this money is chasing investments. A stock-market listing begins to seem tedious when you can just borrow money very cheaply instead.</p>
<p>The second attraction with being private is regulation. Listed companies have become <a href="https://www.ipohub.org/new-pressures-public-company/">tightly regulated</a> on the back of corporate-governance disasters such as <a href="https://www.mbaknol.com/business-ethics/case-study-worldcom-accounting-scandal/">WorldCom</a>, <a href="https://www.bbc.co.uk/news/business-58026162">Enron</a>, <a href="https://ethicsunwrapped.utexas.edu/wp-content/uploads/2018/07/Raj-Rajaratnam-Insider-Trading.pdf">Galleon Group</a> and more recently <a href="https://www.reuters.com/article/us-germany-wirecard-inquiry-timeline-idUSKBN2B811J">Wirecard</a>. These constraints <a href="https://www.forbes.com/sites/forbesfinancecouncil/2020/02/26/why-more-businesses-are-choosing-to-stay-private/?sh=1ee628586400">have motivated</a> many a company to skip public scrutiny by choosing to be private instead.</p>
<p>Another problem with public markets is how illogical they have become. Now that amateur traders can buy and sell shares easily through platforms like eToro and Robinhood, company valuations are at the mercy of their whims. Witness GameStop and other shares going through the roof earlier this year thanks to the Reddit group <a href="https://theconversation.com/gamestop-im-one-of-the-wallstreetbets-degenerates-heres-why-retail-trading-craze-is-just-getting-started-154584">WallStreetBets</a>. </p>
<p>Amateur traders can also choose to automatically copy the trades of professionals or celebrity traders on a platform like eToro. One celebrity trader’s decisions in the market can mean that many people make the same trade, increasing volatility across hitherto unrelated assets. </p>
<p>Equally, tweets and memes can send valuations soaring or sinking. A good example was <a href="https://theconversation.com/bitcoin-what-elon-musks-u-turn-on-tesla-payments-means-for-future-of-crypto-160891">Elon Musk</a> driving up the price of dogecoin by making positive noises about the cryptocurrency on Twitter, including referring to himself as the #Dogefather. No wonder many company boards would rather keep away from such a volatile environment. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"1392030108274159619"}"></div></p>
<h2>Is it worth it?</h2>
<p>Sometimes when business leaders have decided to go private in the past, they have reversed this later. <a href="https://www.theverge.com/2018/8/13/17644234/michael-dell-enterprise-technology-consumer-laptop-private-public-emc">For example, Michael Dell</a> took his computer company private in 2013 only to re-list it five years later. He had got the business into a stronger position that he felt would be recognised by the markets. Musk himself <a href="https://www.cnbc.com/2018/08/08/elon-musk-wants-to-take-tesla-private--heres-what-it-means.html">has mused</a> about taking Tesla private, having felt that the car company was being undervalued by the markets in the past, though now it’s a different story after the share price has surged in the past couple of years. </p>
<p>Neither is an improvement in a company’s market sentiment the only argument for staying listed. The greater transparency can be a selling point to investors, and selling shares to them is not the only way to take advantage of this. Companies can always opt for loans or bonds as alternatives – and hence limit their exposure to social media influencers and amateur traders. </p>
<p>And instead of living in fear of negative sentiment, companies might see it as a challenge and reflect on how to better respond. This might involve intensifying their public relations, advertising and lobbying strategies to better explain the company to the outside world. </p>
<p>Company executives can still be hurt by big shifts in their share price because this is typically one of the performance indicators that determines what they get paid. But again, delisting isn’t the only way around this problem. Instead, companies can rethink their performance indicators – perhaps putting more emphasis on environmental performance, for example, in anticipation of the fact that regulations in this area are bound to increase. </p>
<p>One other potential medium-term advantage to being listed relates to regulation. The more companies that go private, the more likely that regulators will impose more rules on them to protect their investors and prevent fraud. They might even be tempted to increase taxes on private companies to make up for the lack of regulatory scrutiny. In this sense, the allure of going private might turn out to be fool’s gold.</p><img src="https://counter.theconversation.com/content/169067/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>Despite a boom in IPOs, a larger number of companies are going in the opposite direction.Karl Schmedders, Professor of Finance, International Institute for Management Development (IMD)Patrick Reinmoeller, Professor of Strategy and Innovation, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1588432021-04-13T11:37:39Z2021-04-13T11:37:39ZCoinbase is listing for US$100 billion on NASDAQ, but you might be better buying bitcoin instead<figure><img src="https://images.theconversation.com/files/394752/original/file-20210413-19-a4rtki.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why buy Coinbase when you can buy bitcoin?</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/tula-russia-january-27-2019-coinbase-1303078000">Burdun Iliya</a></span></figcaption></figure><p><a href="https://www.coinbase.com/">Coinbase</a>, the San Francisco-based cryptocurrency exchange, is going <a href="https://blog.coinbase.com/coinbase-announces-proposed-direct-listing-3a52c4298ccc">public</a> on April 14. The company will trade under the ticker COIN and list 114,850,769 shares on the NASDAQ with an initial valuation of US$100 billion (£73 billion). </p>
<p>Instead of following the traditional initial public offering (IPO) route, Coinbase plans to post its shares straight on the NASDAQ exchange via a direct listing, a technique pioneered by big names like <a href="https://techcrunch.com/2018/03/15/spotify-direct-listing-date/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAC5fhVVaURKaljtZtkBVtUuL58--MO64hX42gwzCmJ-0--XUxUMECrQ2cPimILsdvhDcJD46vzYo5depAPvog5I1CM1gN-YN1NwIH8do4pWnd449X4PLoTyKUSUznkN3j20jAJLaaTJRAiQuPWRFrCvbnKI1aKBtcoiMZAIV5pxa">Spotify</a> and <a href="https://www.businessinsider.com/palantir-ipo-direct-listing-market-debut-2020-9?r=US&IR=T">Palantir</a> in recent years. <a href="https://www.investopedia.com/investing/difference-between-ipo-and-direct-listing/">Whereas an</a> IPO involves a company creating new shares and having an underwriter that buys them for a set price and then sells them to the market, in a direct listing a company sells existing shares and has no underwriter.</p>
<p>But what is Coinbase and why is this such as important development in the cryptocurrency market?</p>
<h2>The Coinbase business model</h2>
<p>Coinbase was founded in 2012 by Brian Armstrong, a former engineer at Airbnb, and Fred Ehrsam, who was a trader at Goldman Sachs. Their mission was to make investing and transacting in cryptocurrencies easier, more efficient and fairer. </p>
<p>The company has since risen to become <a href="https://coinmarketcap.com/rankings/exchanges/">the largest</a> cryptocurrency exchange in the US. Even though there are numerous other exchanges around the world with considerably larger trading volumes, including Binance, Huobi and OKEx, Coinbase’s growth has been incredible lately. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="Coinbase CEO Brian Armstrong speaking at TechCrunch 2018" src="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=409&fit=crop&dpr=1 600w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=409&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=409&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=514&fit=crop&dpr=1 754w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=514&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/394753/original/file-20210413-23-1g2do48.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=514&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">Coinbase CEO Brian Amstrong.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/techcrunch/29603361687/in/photolist-K2hb91-JXnrCB-J8V9vg-J8UvZS-J8VnFV-JXo41a-J8VaZZ-JDsm85-K5hzax-K2gDWC-JDs4KA-JV89AG-K5hnbx-K5h5xH-JV8a69-J8Uugm-J8Uos7-J8TPdG-J8UtdQ-JWzo9f-JV82Jf-J8TUom-K2gMEJ-JV8aD3-NJiZdw-M6WY4H-M6WXDe-K2gzB5-K2gX3w-J8US3B-J8U68h-NJiZhE-K2gVT7-K2gSxj-JXnhCc-K5hhkR-K2gGP1-J8UMBn-pHARdC-pHARjE-K2gL73-JV83LW-ptfVSx-K5gQEc-M6WY8R-pKGehp-J8VmAt-pthY1u-pthYpW-J8UUge">TechCrunch</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
</figcaption>
</figure>
<p>It has just reported <a href="https://investor.coinbase.com/news/news-details/2021/Coinbase-Announces-First-Quarter-2021-Estimated-Results-and-Full-Year-2021-Outlook/default.aspx">preliminary results</a> for the first quarter of 2021, with revenue surging to US$1.8 billion. This is a ninefold increase from the first quarter in 2020 and more than the US1.3 billion that the company made in the <a href="https://www.sec.gov/Archives/edgar/data/1679788/000162828021003168/coinbaseglobalincs-1.htm">whole of 2020</a>. Net income for the first quarter is expected to be in the range of US$800 million, compared to US$322 million in calendar 2020. In the past three months alone, the verified userbase has risen 30% to 56 million people. </p>
<p>So how does Coinbase make money? It earns fees and commissions when customers buy or sell cryptocurrencies, though there is no charge to store cryptocurrencies in customer wallets. The <a href="https://help.coinbase.com/en/coinbase/trading-and-funding/pricing-and-fees/fees">fees include</a> margin fees, where Coinbase charges 0.5% for purchases and sales, although this figure can vary depending on market conditions. </p>
<p>It also charges a “Coinbase fee”, which is commission on all crypto transactions which depends on your location and the total amount of your transaction. The company also has other lines of business including international payment system <a href="https://commerce.coinbase.com/">Coinbase Commerce</a>, a Coinbase Visa card, and USD Coin (USDC), a stablecoin cryptocurrency whose price is pegged 1:1 to the US dollar. Coinbase co-founded USDC along with crypto financial services platform <a href="https://www.circle.com/en/">Circle</a>, and makes money from the stablecoin by reinvesting the dollars that users exchange for it in safe assets such as short-term US Treasury bonds. </p>
<h2>How sustainable is it?</h2>
<p>When it comes to investing in Coinbase, the same rules apply for buying any stock – there is risk and the performance of the stock will depend on demand and the company’s future success. Coinbase’s fate is obviously tied to the performance and uptake of bitcoin and other cryptocurrencies. If investors lose interest in cryptocurrencies, Coinbase’s business will be in trouble. Coinbase also has to contend with competitors arriving every day, many of whom become big very quickly. Binance, the market leader with US$39 billion in daily volumes, only launched in 2017 for example. </p>
<p>But given the surge in cryptocurrency prices, <a href="https://theconversation.com/bitcoin-why-the-price-has-exploded-and-where-it-goes-from-here-152765">especially bitcoin</a>, in the last year, there are more and more individuals and large institutions such as <a href="https://www.bloomberg.com/news/articles/2020-12-10/169-year-old-insurer-massmutual-invests-100-million-in-bitcoin?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosmarkets&stream=business">MassMutual</a> and <a href="https://www.cnbc.com/2021/02/08/tesla-buys-1point5-billion-in-bitcoin.html">Tesla</a> looking to gain exposure to this alternative investment. And with the COVID-19 pandemic forcing governments to spend heavily on support measures and central banks creating lots of extra money to stimulate their economies, <a href="https://medium.com/road-less-ventured/why-bitcoin-is-a-superior-store-of-value-e5464d5fd619#:%7E:text=Thus%2C%20Bitcoin%20is%20the%20only,ideal%20store%20of%20value%20asset.">many investors worry</a> about the inflation that this could cause, which would devalue <a href="https://www.ig.com/uk/glossary-trading-terms/fiat-currency-definition">“fiat” currencies</a> like the dollar and pound. Since bitcoin is designed to never have more than a <a href="https://www.buybitcoinworldwide.com/how-many-bitcoins-are-there/">maximum of 21 million</a> in circulation, it is seen by these investors as a store of value to protect their wealth from this problem. </p>
<p>Brian Armstrong himself <a href="https://www.businessinsider.in/tech/news/read-coinbase-ceo-brian-armstrongs-letter-celebrating-the-cryptocurrency-platform-filing-to-go-public-via-direct-listing/articleshow/81213015.cms">is very bullish</a> in terms of the uptake in cryptocurrencies. In a letter celebrating the platform filing to go public, he wrote: </p>
<blockquote>
<p>Trading and speculation were the first major use cases to take off in cryptocurrency, just like people rushed to buy domain names in the early days of the internet. But we’re now seeing cryptocurrency evolve into something much more important. People are using cryptocurrency to earn, spend, save, stake, borrow, lend, vote and perform many other types of economic activity.</p>
</blockquote>
<p>Nonetheless, much of this is an argument for holding cryptocurrencies themselves, so why would investors want to buy shares in a crypto exchange instead? It is a way of tapping into the huge rise in this market without actually buying cryptocurrencies directly. For investors who worry about the <a href="https://www.buybitcoinworldwide.com/volatility-index/">high volatility</a> in crypto prices, as well as the fact that it <a href="https://www.nasdaq.com/articles/3-key-takeaways-from-last-years-biggest-crypto-hacks-2021-01-19">can be stressful</a> trying to store cryptocurrencies safely, Coinbase could be an attractive alternative. This might particularly appeal to financial institutions like pension funds that take a very conservative approach to investing. </p>
<p>No doubt when Coinbase lists under the ticker COIN, it will draw a lot of attention. Demand will be high and with any listing of this size, there will be major fluctuations throughout the following few days as trading volumes will be large. But if you are interested in investing in cryptocurrencies, you are probably still better off investing in the digital coins themselves as their performance depends only on the level of demand for them. </p>
<p>The performance of COIN will depend on Coinbase staying ahead of the pack and offering cheap and secure access to cryptocurrencies, so it has an underlying vulnerability that is distinct from the assets themselves. Nevertheless, the listing will expose more investors to the cryptocurrency world and is another sign that the finanical ecosystem is starting to take notice of cryptocurrencies.</p><img src="https://counter.theconversation.com/content/158843/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Andrew Urquhart owns cryptocurrencies but does not hold any shares in Coinbase. </span></em></p>America’s number one crypto exchange is floating via a direct listing.Andrew Urquhart, Associate Professor of Finance, ICMA Centre, Henley Business School, University of ReadingLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1159112019-05-06T21:24:33Z2019-05-06T21:24:33ZUber drivers strike: Organizing labour in the gig economy<figure><img src="https://images.theconversation.com/files/272874/original/file-20190506-103085-1x2r7zv.jpg?ixlib=rb-1.1.0&rect=0%2C314%2C5874%2C2730&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Drivers for the ride-hailing giant Uber are planning a national day of action to protest labour conditions. </span> <span class="attribution"><span class="source">Dan Gold/Unsplash</span></span></figcaption></figure><p>In recent weeks, Uber is alleged to have lowered wages and raised prices to gain the favour of capital markets ahead of its May 9 <a href="https://www.marketwatch.com/story/uber-ipo-5-things-you-need-to-know-about-potentially-the-biggest-ipo-in-years-2019-04-12">Initial Public Offering (IPO)</a>, the largest one in years. This alleged change to fee structures has galled Uber drivers who don’t expect to reap much of the benefit of the IPO. In response, drivers in several major U.S. cities say they will turn off their apps for two hours on May 8, as part of a coordinated <a href="https://www.reuters.com/article/us-uber-ipo-strike-new-york/ride-hailing-drivers-in-new-york-to-strike-ahead-of-uber-ipo-idUSKCN1S922A">National Day of Action</a>.</p>
<p>Uber is one of the most successful firms in the <a href="https://www.bbc.com/news/business-38930048">“gig economy,”</a> which is now comprised by a wide range of industries, including couriers, educators, journalists and carpenters, among many others. </p>
<p>On paper, work in the gig economy sounds great. </p>
<p>Workers have flexible hours, and can usually work whenever and however much they want. This means they can supplement their income from an existing job, make income in between jobs or even do full-time gig work. Firms have lower labour costs because they don’t have to spend on vacation pay, sick pay and other worker benefits, and don’t have to invest in worker safety, which is left up to the worker. </p>
<p>Crucially, they also don’t have to worry about paying workers when there is no demand for their service. If no one needs a ride right now, Uber effectively has no labour cost. This lack of income security is a primary source of the rising tension between workers and firms. In the gig economy, firms legally treat workers as independent contractors as opposed to permanent employees. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&rect=130%2C122%2C4672%2C3009&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/272872/original/file-20190506-103045-zomj50.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Cars pass the Queensboro Bridge in New York. Drivers for the ride-hailing giant Uber are planning a national day of action to protest labour conditions.</span>
<span class="attribution"><span class="source">(AP/Frank Franklin II)</span></span>
</figcaption>
</figure>
<p>A recent <a href="https://www.wired.com/story/feds-rule-companys-gig-workers-contractors/">opinion letter on contract workers written by the U.S. Department of Labor</a> confirms that this isn’t likely to change any time soon. The implications are significant; it means workers have essentially no job security, either in terms of employment or wages. </p>
<h2>Little to no union presence</h2>
<p>Worker benefits, safety and job security are all terms of employment that have historically been won and maintained by unions. Unions have little to no presence in the gig economy, due largely to opposition from firms. </p>
<p><a href="https://www.theguardian.com/us-news/2019/mar/22/uber-lyft-ipo-drivers-unionize-low-pay-expenses">It is probably not surprising that firms, especially ones in the gig economy</a>, are opposed to the unionization of their workers. Widely accepted <a href="https://www.jstor.org/stable/2171852?seq=1#metadata_info_tab_contents">economics literature shows that unions raise worker wages, especially in low-skill work</a>. </p>
<p>But another <a href="https://doi.org/10.1093/qje/qjr058">study</a> — perhaps more relevant to the gig economy — which looked at private sector firms in the United States over three decades found that unions significantly decrease the long run equity value (as measured by the stock price) of publicly traded firms. That study concluded that unionization has a particularly large effect on stock price when worker support for unionization is large, as it is in the ride-sharing industry. </p>
<p>So not only do firms like Uber want to avoid worker unionization to keep labour costs low, but, with the IPO looming, these firms probably also have an eye on their future equity values.</p>
<h2>Benefits of collective action</h2>
<p>The strikes on May 8 are being organized by groups such as <a href="https://drivers-united.org/">“Rideshare Drivers United”</a> a group of Uber and Lyft drivers “who are building (an) organization to fight for the dignity of our work and better lives.” These groups are being aided by national advocacy groups such as <a href="https://www.gigworkersrising.org/">Gig Workers Rising</a>. In practical terms, the groups organizing the strike are playing the role traditionally played by unions. </p>
<p>Unions solve what social scientists call a “collective action problem.” It is easy to see why organizing a strike, for example, is difficult. Suppose you are an Uber driver in Los Angeles on May 8 and you expect all the other drivers to turn their apps off as part of the Day of Action. </p>
<p>You could make a lot more money than you normally would by being the only Uber driver in Los Angeles with her app on. In his classic <a href="http://www.hup.harvard.edu/catalog.php?isbn=9780674537514">1965 work on the subject, Mancur Olson</a> explains why large groups suffer from this type of “free rider” problem, which helps explain why small groups (i.e., dairy farmers) have an easier time organizing and influencing policy than do large groups of workers. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=472&fit=crop&dpr=1 600w, https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=472&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=472&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=593&fit=crop&dpr=1 754w, https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=593&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/272559/original/file-20190503-103078-19ixhpp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=593&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Taxi drivers in Montréal held a one-day strike last month to protest proposed legislation they say would bankrupt their industry under the weight of competing ride-hailing services. Uber drivers took the share of rides that day.</span>
<span class="attribution"><span class="source">THE CANADIAN PRESS/Ryan Remiorz</span></span>
</figcaption>
</figure>
<p>While workers in the gig economy could potentially benefit from a union, the timing could hardly be worse. In the U.S., union membership has <a href="https://www.economist.com/united-states/2018/07/19/how-the-decline-of-unions-will-change-america">been on the decline for decades</a>. Moreover, the current political climate in the U.S. makes this a harder time than ever to form a new union. </p>
<p>Unions have long been a reliable source of both votes and campaign funds for the Democratic party. With this in mind, Republicans in several U.S. states have sought to cripple unions by <a href="https://www.washingtonpost.com/news/made-by-history/wp/2018/04/24/the-right-to-work-really-means-the-right-to-work-for-less/?utm_term=.6a8f17d2ecf5">enacting “right to work” legislation</a>, which gives employees the right by law to work in unionized workplaces without being a dues-paying member of the union. </p>
<p>A recent <a href="https://jamesfeigenbaum.github.io/research/pdf/fhw_rtw_jan2018.pdf">paper</a> by economist James Feigenbaum at Boston University and his colleagues finds that these laws have indeed been effective in reducing Democratic success at the ballot box. Unionization isn’t a likely solution to the woes of gig economy workers in the near future.</p>
<h2>A role for government?</h2>
<p>Few would argue that Uber has made life better for customers — there is a reason it has so severely disrupted the industry. But in the absence of an effective organization to advocate for its workers, the business model that makes Uber so successful presents complicated challenges for government policy. </p>
<p>Gig economy workers make costly long-term investments that tie them to employment in their chosen gig. In the case of Uber, this means buying a car and paying for the related costs associated with insurance and meeting safety standards etc. By contrast, Uber is not tied to any particular driver in the same way. The result is that many gig economy workers are just a small wage cut away from dire financial straits — or worse. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/272556/original/file-20190503-103057-1cny3oo.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">Taxi driver anti-Uber protests like this one in Warsaw, Poland on April 8, 2019 have taken place in several global cities.</span>
<span class="attribution"><span class="source">Shutterstock</span></span>
</figcaption>
</figure>
<p>Economic security of workers in the gig economy is not the only issue for government policy as firms like Uber continue to expand their presence. By virtue of its own success, Uber has also significantly hastened the decline of the taxi industry, leaving taxi drivers in many cities heavily underemployed. </p>
<p>Some drivers close to retirement age have seen their retirement plans disappear as the value of taxi medallions (permits) have plummeted. The toll on the mental health of these workers has been so significant that suicide among drivers is now a <a href="https://www.nytimes.com/2018/12/02/nyregion/taxi-drivers-suicide-nyc.html">noticeable pattern</a>, and has led to calls for government intervention and taxi strikes in cities from <a href="https://www.cbc.ca/news/canada/montreal/quebec-taxi-protest-1.5085831">Montréal</a> to <a href="https://www.cbc.ca/news/world/weeklong-taxi-strike-against-uber-hinders-traffic-in-madrid-1.4995241">Madrid</a>. </p>
<p>Free market competition and the entrepreneurship and innovation it is capable of generating is undoubtedly a great source of consumer welfare. The same is not always true for workers. Policymakers would be wise to take action while the situation is still manageable.</p><img src="https://counter.theconversation.com/content/115911/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Arvind Magesan receives funding from Social Sciences and Humanities Research Council of Canada.</span></em></p>Drivers for Uber, one of the most successful companies in the gig economy are set to strike by turning their apps off for one day this week as their company prepares for its IPO.Arvind Magesan, Associate Professor of Economics, University of CalgaryLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/942092018-04-04T14:07:06Z2018-04-04T14:07:06ZSpotify goes for gutsy direct listing on stock exchange – here are the winners and losers<figure><img src="https://images.theconversation.com/files/213163/original/file-20180404-189816-1mkg58o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Spotify goes premium.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/new-york-city-april-3-2018-1060490090?src=DpbEu1ST8xml0GAzY_o2Xg-2-89">Shutterstock</a></span></figcaption></figure><p>When Spotify finally <a href="https://www.cnbc.com/2018/04/03/spotify-spot-ipo-stock-starts-trading-on-the-nyse.html">went public</a> on the New York Stock Exchange on April 3 as SPOT, it did so in a very unconventional way. For one thing, there was none of the usual fanfare. The CEO didn’t ring the opening bell; in fact, he didn’t even show up. The media covering the event had to talk among themselves as no one from the company was available for interviews. </p>
<p>The initial public offering (IPO) was unusual in other aspects as well. To start with, it was <a href="https://www.investopedia.com/news/what-difference-between-ipo-and-direct-listing/">a direct listing</a>, meaning that the company didn’t issue any new shares. Instead, all the existing shares were listed directly on the exchange for open trading with retail investors but with none of the typical involvement of investment banks. This approach caused some bafflement at the NYSE, as no one really knew how to price the shares. The consensus value was US$132, but after some confusion, the <a href="https://www.cnbc.com/2018/04/03/spotify-spot-ipo-stock-starts-trading-on-the-nyse.html">shares opened up</a> around lunchtime at US$165.90, then closed the day at US$149.01, valuing the company at US$26.5 billion.</p>
<p>By all standards, this was a successful IPO – the company shares rose above their assumed opening price, and demand was strong, even in an uncertain market where recent IPOs have struggled. Let’s take a look at the main winners and losers.</p>
<h2>Winners and losers</h2>
<p>The clear winners are undoubtedly Spotify’s shareholders, consisting of venture capitalists, music companies like Sony BMG, early investors like China’s Tencent, and employees. They saw their holdings grow massively without having to share the gains with the usual gaggle of investment banks and institutional investors. </p>
<p>Others on the winning side were companies contemplating going public, but nervous about the traditional path. Spotify has shown that a direct listing approach can work. </p>
<p>Additionally, Spotify users and customers will benefit as well. Subject to the disclosure rules of the NYSE, Spotify will now be obliged to publish earning releases, insider trading transactions, executive compensation and other decisions which ultimately determine the sustainability of the company. Spotify’s management is therefore submitting itself to the discipline of markets. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/213164/original/file-20180404-189813-ttwf2b.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">Spotify employees will benefit, as will customers.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/malaga-spain-april-26-2015-smiling-349880507?src=DpbEu1ST8xml0GAzY_o2Xg-2-3">Shutterstock</a></span>
</figcaption>
</figure>
<p>Retail investors have clearly benefited from the IPO mechanics. In a standard book-building process, the initial allocation of shares goes to institutional investors, who can then flip their shares in the secondary market and benefit from IPO underpricing. Since new retail investors have direct access to the shares originally sold, the underpricing proceeds (about US$17 per share) have been partly enjoyed by individual, not institutional, investors.</p>
<p>However, not everyone was a winner.</p>
<p>Investment banks and others that typically benefit from the listing of shares were largely cut out of Spotify’s IPO (although the company did retain financial advisers). By pursuing a direct listing, Spotify probably avoided tens of millions of dollars in direct fees, and didn’t have to give special deals to large investors. True to its Scandinavian roots, Spotify chose an egalitarian route.</p>
<p>Wall Street banks, already nervous about <a href="https://www.investopedia.com/terms/i/initial-coin-offering-ico.asp">Initial Coin Offerings</a> (ICOs), crowdfunding, and other avenues to raising capital, will be nervous about Spotify’s approach to going public. <a href="https://www.nytimes.com/2004/05/10/business/for-google-going-dutch-has-its-rewards-and-its-risks.html">Google tried a similar route in 2004</a> when it tried to sell shares directly to the public through <a href="https://www.wired.com/2011/01/snubbed-by-google-goldman-sachs-friends-facebook/">a “Dutch auction” process</a> and without underwriters. Ultimately, it surrendered to the Investment Banking industry and ended up hiring advisers to help with its IPO. The Spotify IPO marks a new era in IPO underwriting as market participants now have direct access to information about companies that seek financing. Investment banks are no longer necessary. </p>
<h2>What about Spotify itself?</h2>
<p>If the investment banks were the losers and early investors the winners, where does that leave the company itself? We think that Spotify is in a worse position now compared to when it was private. While its IPO has been great for its investors, we don’t think it’s been as good for the company. There are three reasons for this.</p>
<p>First, the company raised no new capital. By listing directly, all the gains went to investors and none to the company itself. By contrast, Alibaba <a href="https://dealbook.nytimes.com/2014/09/18/alibaba-raises-21-8-billion-in-initial-public-offering/">raised US$21 billion</a> and <a href="https://dealbook.nytimes.com/2012/05/17/facebook-raises-16-billion-in-i-p-o/">Facebook raised US$16 billion</a> when they went public. This means that Spotify must rely on existing sources of capital and ongoing operations to fund its growth. Unfortunately, <a href="https://www.ft.com/content/974206c0-2609-11e8-b27e-cc62a39d57a0">it is losing money</a> (it has never made a profit), and will thus need to become more efficient, raise its prices, or both. Without new capital, it will be harder for the company to compete. </p>
<p>When companies go public without raising funds, they usually do it to issue “acquisition currency”, that is, to either make it easier for potential acquirers to buy the company now that it is publicly listed (through a tender offer); or to allow the company to embark on acquisitions in the home market – a stock-for-stock acquisition in the US is only possible if the acquirer’s shares are listed on US markets. In either case, the Spotify IPO marks a new growth strategy that is focused, not on organic growth and innovation, but on combining its platform and customer base with other larger and smaller companies.</p>
<p>Second, and as mentioned earlier, Spotify will now be subject to all the rules and regulations required as a publicly listed company. It will also need to be transparent in its financial position, and subject to much more media, analyst, and investor scrutiny. Management will have to spend more time managing shareholders. This will make the company more transparent, but also less agile.</p>
<p>Third, private companies generally have more freedom to think in the long term. Spotify will now have to cater more to the short-term whims of investors.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/213167/original/file-20180404-189830-3upvdi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Daniel Ek, Spotify CEO.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/leweb3/6482059981/in/photolist-aSNfAR-bD7zhG-aSHRPM-aSHTx4-aVqi3M-bVbiyN-aUcHXK-aSNfWc-aUcHBT-aUcGzi-aUcGTr-aTfLPe-8GkmF1-duyWLh-UZUxjd-UZot7z-gYWzyp-V3P922-UAQPjJ-gYWuGv-aUcHgR-Vc1XX6-V12HWb-TWX5L5-aSJ2pP-aSJhp8-aSHNyZ-aSNhdZ-c86MGq-UWA5v7-U1Ltjt-VesJxB-gYWxm9-VaThHA-aSJ2ui-gYWCsG-gYWBL9-V2L6YB-gYWysN-UYZ1Lq-VfpjKg-TWX5f5-nG5Tnf-V2KTKP-U1Luj4-CeCim-UYVdHQ-UDbkaL-UE7Zjo-V2Hxsi">Official Leweb Photos</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The day before the listing, Daniel Ek, one of Spotify’s founders and company CEO, published a blog about the IPO. <a href="https://newsroom.spotify.com/2018-04-02/tomorrow/">He said</a>:</p>
<blockquote>
<p>Spotify is not raising capital, and our shareholders and employees have been free to buy and sell our stock for years. So, while tomorrow puts us on a bigger stage, it doesn’t change who we are, what we are about, or how we operate.</p>
</blockquote>
<p>But as a public company, Spotify will undoubtedly have to change who it is. It will become less flexible and more restricted in how it operates. And, it took on these additional constraints without the benefit of raising capital. While direct listing was a gutsy move that tempered the greed of Wall Street, we are not convinced that it resulted in a net benefit for the company.</p><img src="https://counter.theconversation.com/content/94209/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>Spotify chose an unconventional route for its listing on the New York Stock Exchange. But its gutsy move will be a worry for the banks and doesn’t guarantee a net benefit for the company.Arturo Bris, Professor of Finance, International Institute for Management Development (IMD)Michael Wade, Professor of Innovation and Strategy, Cisco Chair in Digital Business Transformation, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/717102017-01-24T07:32:02Z2017-01-24T07:32:02ZDisappearing votes: why investors should steer clear of Snapchat’s dual-class shares<figure><img src="https://images.theconversation.com/files/153807/original/image-20170123-8051-1nnqzc3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Snapchat's dual-class shares could leave a bad taste</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Snapchat’s parent company (Snap) is preparing for an intial public offering (IPO). But it seems that ordinary shareholders will <a href="http://www.theaustralian.com.au/business/wall-street-journal/in-snap-ipo-new-investors-to-get-zero-votes-while-founders-keep-control/news-story/75ee361a68f45369ce3f8644a39ac35c">not have voting rights</a>. Shares in the newly public Snap will either be dual-class or multi-class.</p>
<p>A dual-class structure creates two classes of shares, each with different voting rights; a multi-class structure has multiple share classes. This structure is allowed in the United States. However, <a href="http://www.asx.com.au/documents/rules/gn03_cooperatives.pdf">with a few exceptions</a>, it is not permitted in Australia. </p>
<p>A dual-class share structure is what allows Mark Zuckerberg, for example, to control Facebook. Zuckerberg <a href="https://origin-www.bloombergview.com/articles/2016-04-28/mark-zuckerberg-gets-to-control-facebook-a-while-longer">only owns about 15% of all outstanding shares</a> in Facebook, but he <a href="https://www.sec.gov/Archives/edgar/data/1548760/000119312514039819/d669093dsc13g.htm">owns a considerable amount of “class B” shares</a>. These receive ten votes for every vote a class A share receives.</p>
<p><a href="http://www.theglobeandmail.com/globe-investor/investment-ideas/research-reports/the-case-for-investing-in-companies-with-dual-class-shares/article29638161/">Anecdotes abound</a> about whether dual-class structures benefit shareholders. However, cherry-picking individual corporate cases does not an argument make. Indeed, shareholders have good reasons to be concerned. </p>
<p>Dual and multi-class share structures have been shown to destroy shareholder value and many companies have ended up in litigation.</p>
<h2>Dual-class structures are quite common</h2>
<p>News Corp is <a href="http://abcnews.go.com/Business/story?id=3759233">another prominent example</a> of a dual-class share structure. This structure gives the Murdoch family super-normal voting rights. </p>
<p>Alibaba is listed in the US, rather than Singapore or Hong Kong, <a href="https://www.ft.com/content/0bc597ee-6b42-11e5-aca9-d87542bf8673">in part to achieve this structure</a>. Several tech firms, including <a href="http://blogs.wsj.com/cfo/2015/08/12/googles-multi-class-stock-structure-made-alphabet-move-unique/">Google</a> and even Australia’s <a href="http://www.smh.com.au/business/markets/atlassian-ipo-dual-class-shares-and-the-case-for-founder-control-20151110-gkvxfh.html">Atlassian</a> (which is listed in New York on the Nasdaq), also have this structure. </p>
<p>The number of firms listing with multi-class share structures has increased in recent years. In part, though, this reflects an increase in IPO activity as the market recovered from the financial crisis.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=405&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=405&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=405&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=509&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=509&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153991/original/image-20170123-8057-cqk4sx.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=509&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Initial public offerings with multi-class share structures. This includes limited partnerships with multiple share classes.</span>
<span class="attribution"><span class="source">Jay Ritter, https://site.warrington.ufl.edu/ritter/files/2017/01/IPOs-from-1980-2016-with-Multiple-Share-Classes-Outstanding.pdf . Accessed January 23 2017.</span></span>
</figcaption>
</figure>
<p>But dual-class structures are not uncommon even among larger companies. According to <a href="https://www.issgovernance.com/controlled-companies-generally-underperform-boards-less-diverse-new-study-finds/">recent data</a> from Institutional Shareholder Services (ISS), an investor advocacy and advisory group, nearly 6% of the largest 1,500 listed US firms have a dual-class structure. But this has fallen slightly over time.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=435&fit=crop&dpr=1 600w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=435&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=435&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=547&fit=crop&dpr=1 754w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=547&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/153992/original/image-20170123-8093-5of2t6.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=547&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Proportion of S&P 1,500 firms with multi-class share structures.</span>
<span class="attribution"><span class="source">ISS data available on WRDS. Accessed on January 23 2017.</span></span>
</figcaption>
</figure>
<h2>Resisting outside pressure</h2>
<p>Dual-class structures benefit the dominant shareholder group. This will be true in Snap’s case. </p>
<p>Super-voting rights “entrench” the dominant shareholders and the CEO. They do this by enabling CEOs to resist outside pressure from shareholders. </p>
<p>This also enables them to resist disciplinary takeovers. These are takeovers that are designed to remove poorly performing CEOs. Dual-class structures frustrate such deals because they enable dominant shareholders – including the CEO – to vote down a takeover offer. </p>
<p>News Corporation, for example, has <a href="http://www.asx.com.au/asxpdf/20150619/pdf/42z8q1dw9602d4.pdf">a poison pill</a>, allowing managers to resist takeover attempts. For some high-tech, and hard-to-value firms, giving managers some breathing room from hostile takeovers could enable them to <a href="http://dx.doi.org/10.1002/smj.2121">focus on long-term value-creation</a> without having to worry about short-term price movements. </p>
<p>But entrenching managers against hostile takeovers has been shown to <a href="http://dx.doi.org/10.1016/j.jfineco.2012.05.016">destroy shareholder value</a>. By removing the threat of external discipline, these structures can enable managers to <a href="http://dx.doi.org/10.1016/j.jfineco.2012.05.016">exercise less caution</a> when making investments.</p>
<p>Dual-class structures go further than mere protection from takeovers. They also enable managers to resist shareholder advocacy as other shareholders lack voting rights. This effectively removes shareholders’ rights to pressure managers over performance. This is problematic as pressure from institutional investors helps to restrain, and discipline, managers. </p>
<h2>Destroying shareholder value</h2>
<p>The academic literature firmly shows that <a href="http://dx.doi.org/10.1111/j.1540-6261.2009.01477.x">dual-class companies underperform</a> in terms of acquisition performance and returns to cash holdings and capital expenditure. This is backed up by <a href="https://irrcinstitute.org/reports/new-study-says-multiclass-voting-companies-underperform-riskier/">shareholder activists’ reports</a>. A 2016 <a href="https://irrcinstitute.org/wp-content/uploads/2016/03/Controlled-Companies-IRRCI-2015-FINAL-3-16-16.pdf">study</a> by ISS shows that CEOs of multi-class companies receive more compensation, but generally generate lower stock returns, revenue growth and ROE (return on equity) growth.</p>
<p>These structures also clearly have the potential to allow managers to act against shareholders’ interests. For example, Bombardier’s talks seeking aid from the Canadian government <a href="http://business.financialpost.com/news/transportation/bombardier-aid-talks-said-to-stall-on-trudeaus-3-billion-pitch">stalled</a> after the founding family objected to relinquishing its dual-class share structure. Mobile games maker Zynga has underperformed the market, was forced to <a href="http://www.forbes.com/sites/erikkain/2015/05/10/zynga-needs-a-hit-as-employees-face-layoffs-data-centers-shut-down/#e3ccef14a80d">retrench</a> staff and is <a href="http://www.businessinsider.com/delaware-court-revives-case-mark-pincus-zynga-stock-sale-2016-12">embroiled in a lawsuit</a> over executives dumping shares before its stock plummeted. </p>
<p>By contrast, the end of Yelp’s dual-class structure in 2016 coincided with positive returns and talk that it <a href="http://seekingalpha.com/news/3210618-yelp-caught-m-chatter-2_6-percent-ends-dual-class-shares">could come into play</a> as a takeover target. </p>
<p>This all implies that dual-class structures exacerbate agency conflicts in general. This has led ISS to <a href="https://corpgov.law.harvard.edu/2016/08/10/the-impact-of-iss-new-policy-on-ipo-company-director-elections/">recommend generally voting against</a> directors involved in establishing dual-class structures. </p>
<p>Major investor Calpers has <a href="http://www.reuters.com/article/us-iac-interactive-lawsuit-calpers-idUSKBN1412Q5">sued</a> over the issuance of non-voting stock. Facebook has <a href="http://www.reuters.com/article/us-facebook-stocks-lawsuit-idUSKCN0XQ2LM">faced litigation</a> over plans to issue non-voting shares.</p>
<p>Snap has time to change its plans before its IPO. The IPO’s offer terms are not set in stone and new information comes to light over time. Potential investors can only hope that Snap amends its voting structure. If Snap does not, its share price will very likely suffer.</p><img src="https://counter.theconversation.com/content/71710/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>Investors in Snapchat’s upcoming initial public offering could find themselves without voting power. Research shows these kind of share structures end badly.Mark Humphery-Jenner, Associate Professor of Finance, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.