Comment by ketzo | Hacker News Reader

Comment by ketzo | Hacker News Reader

At least the way I understand it, SPACs offer a trade off, not an upgrade.

The danger of an IPO (from the perspective of the company going public) is the “IPO Pop”: you offer your stock at $20, by the end of the first day it’s trading at $40, and you realize you left a bunch of money on the table.

This is a benefit to the initial investors, who make a big profit day 1.

The inverse risk is the opposite (see Lyft, Slack IPOs): you offer your stock at $20 and it ends the day trading at $10. This sounds bad for you, the company, but it’s kind of fine — you raised the money you wanted to raise. In the short term, it’s bad for your investors, who just lost a big chunk of change.

My numbers here are made up, but the important thing is the spread: an IPO could pop 5% on first day, or 100%, or -80%. The difference there is volatility, which is what you have to pay a bank for — the risk that they lose money instead of popping.

In times of increased volatility (hello 2020!), you’re gonna have to pay a lot. The bank is going to underprice your stock to try and get a bigger “pop”, which, remember, means you’re probably leaving some money on the table.

A SPAC offers a compromise. “Negotiate with us instead, and avoid the pop (or the drop) entirely!” You reduce volatility in exchange for taking a private deal and potentially leaving some money on the table. It’s trading a bigger payday for a smaller risk, which looks pretty good right now. But in times of more financial normalcy, expect more IPOs.

My understanding of SPACs vs. IPOs is based entirely on Matt Levine’s excellent Money Stuff column, btw — go check that out if you want to read stuff from someone who actually knows this stuff.

The pop of an IPO is by design though. Bankers engineer the opening price lower than market so they can sell the stock pre-IPO to their rich clients and guarantee a quick return for them.

The games bankers like Goldman play with IPO pricing only benefit the bankers. The whole thing is bullshit, which is why more tech companies are looking for ways to cut bankers out of the process.

> The whole thing is bullshit, which is why more tech companies are looking for ways to cut bankers out of the process.

Google IPOed with a dutch auction. I have absolutely no idea why other companies trying to "cut bankers out of the process" don't follow suit.

Investment Bankers are performing a service for companies that IPO. For this service they get paid. One of the ways that they get paid is buy allocating IPO shares to favored clients. If you change the system so that they cannot get paid this way, then they will end up getting paid another way: higher fees.

Is that worth the tradeoff? Maybe. But it's very unlikely that there is a free lunch to be had here.

> Investment Bankers are performing a service for companies that IPO.

Sure. But that service is largely marketing. They do a roadshow and talk up your company to everyone who will listen.

That's certainly a valuable service. I'm sure it's even worth it to many companies.

I don't really see how it's that useful for well known B2C companies (e.g. Facebook and Tesla).

private investors may know these famous companies like Tesla, but they may not know the details of their business operations. The investment bankers create a prospectus which describes the "story" of how these companies plan to make money, present financials in a way that is understandable (albeit likely an optimistic way), and then sell the investment as an opportunity.

For doing this work, the bankers do get paid handsomely. Whether this work results in a better investment price for said company remains to be determined tbh, but on the whole, i suspect it must be net positive, otherwise this method of IPO won't have continued for a century.

>"The investment bankers create a prospectus which describes the "story" of how these companies plan to make money, present financials in a way that is understandable (albeit likely an optimistic way), and then sell the investment as an opportunity."

How different are these prospectus from the reports that the companies already provide to their investors and boards though? I guess I'm asking isn't that "story" already written for them?

> Google IPOed with a dutch auction. I have absolutely no idea why other companies trying to "cut bankers out of the process" don't follow suit.

It didn't seem to save them any money. The bids they got all clustered tightly together, the advisory fees they ended up paying were pretty much the same. And economic theory suggests that a Dutch auction gets you worse prices than a conventional auction. All told it didn't go particularly well for Google.

I think it's more likely we'll see more companies doing Spotify/Slack-style direct listings (covid notwithstanding) - those seem to have worked out well enough, and have the potential to cut a bunch of fees out of the process.

Right, designed by the banks who underwrite the IPO -- not necessarily designed by the companies themselves, hence why a SPAC can look (to those companies) like the better option.

The whole sort-of-conflict-of-interest inherent in IPOs has been fascinating for me to learn about.

I believe SPAC targets might also have lower regulatory burdens not entirely sure.

Oooo, that's interesting. I can imagine that's particularly an incentive for startups without robust legal teams.

I always imagined that companies that have their stock price "pop" after IPO would've been better off doing a DPO instead (like Spotify) since they would've gotten more money.

They're engineering it to pop on purpose to play into investor psychology. Getting the IPO oversubscribed and getting headlines about first day performance is a great way to get people to keep talking about and investing in your company.

Not after the stories about how first day buyers got hosed when the stock is flat or down over the next few months.

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