IPOs

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Coke vs. Pepsi.  Apple vs. Microsoft.  Energizer vs. Duracell.  All are great brand rivalries.  Today we look at one of the biggest rivalries in the capital markets space: NYSE vs. Nasdaq.  And ever since the Nasdaq debacle with the Facebook IPO, the rivalry has only intensified. 

Companies going public face lots of decisions including where to list their shares.  Ever since the dot-com craze of the late 1990s, the rivalry between the NYSE and Nasdaq has been fierce.  Each exchange attempts to woo each other’s clients to switch their listing.  In fact, some big names have changed exchanges over the past year.  Texas Instruments and Viacom switched from the NYSE to Nasdaq in 2011.  Earlier this year, TD Ameritrade left Nasdaq for the Big Board, but Nasdaq countered by poaching Kraft.  Nasdaq (with its history of winning the listings of technology companies) and the NYSE have been fighting hand-to-hand in the technology company space with Groupon and Zynga choosing Nasdaq and LinkedIn and Pandora going with the NYSE.  So is one exchange better than the other?  This post will examine some of the most important factors you should consider in making your decision.

Historic Differences.  The NYSE started operating in 1792 while Nasdaq started up in 1971.  The 200 year head start by the NYSE led to a couple of differences initially, but these changes have largely disappeared over the past decade.  Nasdaq has no physical trading floor; it is 100% electronic.  Because the NYSE operated without the assistance of computers for the bulk of its existence, it has a physical trading floor; however, since 2007 virtually all NYSE stock can be traded electronically.  One of the other major differences went away in 2008 when the SEC began allowing Nasdaq-listed companies to have one-, two- or three-letter ticker symbols.  Historically, all Nasdaq-listed companies needed to have a four letter trading symbol.  (Zillow was the first Nasdaq-listed company to take a one-letter trading symbol, “Z.”)  The ticker change followed Nasdaq’s conversion from an interdealer quotation system to a licensed national exchange in 2006, which from an issuer’s perspective, had little to no effect other than to further legitimize the then 35-year old “upstart” Nasdaq.

Branding and Marketing.  The biggest difference between the two exchanges is the public’s perception of the exchanges.  Nasdaq with its upstart image and all electronic trading platform has attracted more technology-based companies, many of which did not qualify to list on the NYSE when they originally went public.  The Big Board, on the o
Continue Reading Where to list: NYSE or Nasdaq?

Facebook’s IPO seemed like a sure thing only a short time ago. This iconic leader in the technology space led by a charismatic CEO seemed destined to have a blockbuster IPO. The IPO encountered a number of substantial problems and challenges, however, and the stock’s post-IPO performance has been far less than stellar, with none of the big increase in the stock price that was widely anticipated. This IPO is now widely viewed as flawed and as a failure in many respects.

 After three full trading days, Facebook’s shares are trading about 16% below the IPO price. The stock closed slightly above its IPO price on its first day of trading, but this only happened because the underwriters bought enough shares to support the stock. A variety of problems contributed to this poor debut, including the sale of large blocks of stock by existing Facebook shareholders, General Motors’ last minute decision to curtail substantial advertising on Facebook, a negative assessment of Facebook’s second quarter revenue forecast by analysts for the lead underwriter (which was allegedly only shared with potential large institutional purchasers), strange technical glitches at NASDAQ and the underwriters’ decision to increase both the number of shares sold and the offering price. Facebook’s final IPO prospectus can be found here.

The stock’s performance suggests that the underwriters’ original valuation ($34 per share) was only slightly higher than the company’s valuation as perceived by investors. The decision to take the IPO price to $38 per share increased the valuation beyond this perceived fair value. The subsequent decline in the stock value has taken the stock price down to a level that the market perceives is reasonable.

While Facebook’s current and prospective problems are daunting, the company was able to raise a huge amount of money at a premium to its actual value, so the IPO transaction was beneficial to the company. This is understandable given the tremendous demand for the stock that existed prior to the IPO, even in light of the problems that existed. The post-IPO results so far, while disappointing when compared to other technology IPOs, are short term and will correct themselves if the company increases its value. I’m actually surprised that the IPO price was as low as it was given the extremely high profile of this offering, but the significant negative factors that surrounded the offering contributed to this. In any case the company’s final valuation was still a huge multiple of historical earnings.

Continue Reading The Facebook IPO – From Sure Thing to Big Mess

On February 13, 2012, the Securities and Exchange Commission issued a No-Action Letter to the Fenwick & West LLP law firm. This No-Action Letter is good news for private companies that are approaching the statutory 500 shareholder limit (which would generally require them to register as public reporting companies under Section 12(g) of the Securities Exchange Act of 1934). Exceeding this limit can be very painful for a company, as it may be forced to register its class of shares under the Securities Exchange Act of 1934, which would require significant disclosures of information (the same as if it had undertaken an initial public offering) without realizing any of the benefits of public company status. The No-Action Letter will allow private companies to issue certain equity-based compensation to employees, directors and some consultants without triggering the reporting requirements of the 500 shareholder limit. Fenwick’s original request for the No Action Letter (which describes the background of this situation) can be found here.

Fenwick is the law firm that represents Facebook in its current initial public offering. Fenwick had previously sought and obtained similar relief specifically for Facebook in 2008. In this No-Action Letter, however, Fenwick obtained a much broader exemption from the SEC on this issue. Since the No-Action Letter was issued to the law firm rather than to a single company, the relief from these public reporting requirements should be very broad and should be applicable to any company whose situation is close enough to that described by Fenwick in its request for the No-Action Letter.

The situation that Fenwick used here involved “restricted stock units” (“RSUs”). RSU’s as described by Fenwick in the No Action Letter are equity compensation vehicles that generally entitle the holder to receive shares of a company’s common stock if certain future conditions are met before the RSUs expire. These RSUs are widely used by some companies, but there was a question regarding whether the issuance of an RSU caused the recipient to become a shareholder of the company, thus increasing the number of total shareholders and potentially causing the company to exceed the 500 shareholder limit.
Continue Reading SEC’s No-Action Letter is good news for pre-IPO companies

As reported in the Wall Street Journal, Facebook, Inc. filed a registration statement with the SEC late Wednesday to register to go public.  This continues the recent trend of established technology companies going public since the beginning of last year.  Whether the stock price ultimately supports its expected lofty valuation remains to be seen.

While the IPO has been long-expected, it is important to remember the reason why Facebook decided to go public: it was required.  Section 12(g) of the Securities Exchange Act of 1934 requires companies that have at least $10,000,000 in assets and at least 500 shareholders as of the end of its fiscal year to register with the SEC.  This shareholder limit has not been adjusted since its adoption in 1964, and causes companies that need to raise capital to face two equally unappealing choices: limit the number of investors to ensure the 500 limit is not breached or register with the SEC regardless of whether being a public company is in the company’s best interests once the limit is met.  While a recent proposed bill in the House has attempted to lessen the burden on private companies looking to raise capital by increasing the shareholder limit from 500 to 1000, to date no legislation has been enacted into law.  The SEC is also reviewing the shareholder limit.

Until Congress or the SEC acts, private companies should consider taking a few safeguards to avoid the requirement to register with the SEC.  First, adopt a shareholders’ agreement that restricts the transferability of the shares.  The transfer restriction will prevent shareholders from subsequently transferring their shares to multiple new shareholders which could cause the company to exceed the limit.  Second, issue stock options to employees rather than shares of stock.  Stock options are considered a separate class of equity security, and since 2007, the SEC has exempted companies from having to register under Section 12(g) because there were more than 500 option holders.  Third, private companies can adopt an insider trading policy that prohibits any employee from reselling their shares.  Facebook adopted such a policy, which effectively eliminated the secondary distribution of its shares.  Fourth, companies can implement high transfer fees to restrict the distribution of its shares similar to the fees
Continue Reading Missed in Facebook IPO frenzy: they had to go public. Here are 6 ways private companies can remain private

Some of the best known names in technology were able to conduct initial public offerings during 2011. These included technology companies like LinkedIn, Pandora, Groupon, Zillow, Demand Media and others. This will likely continue tomorrow as one of the most highly anticipated technology company offerings of the year (Zynga, a developer of online games for Facebook) is scheduled to price its IPO tonight.

The markets remained fairly receptive to these technology IPOs throughout 2011. This is impressive given the general poor state of the capital markets and the high degree of skepticism that greeted many transactions in other industries. Companies from many other industries found themselves either shut out of the capital markets or unable to easily access capital.

Many of these high profile technology companies have been able to maintain or show an increase from their IPO price. Based on recent information, LinkedIn, Groupon and Zillow are all trading well above their IPO prices. This is again impressive given the overall status of the capital markets. Not all technology companies have been successful in the public arena, however, as Pandora, Demand Media and others currently trade well below their IPO prices. The general feeling among investors seems to be that they are satisfied with most of these technology companies for now, but there is also an undercurrent of skepticism.

Of course, the most highly anticipated technology IPO (and one of the most highly anticipated IPOs in history) may occur in 2012 if Facebook elects to proceed with its offering. There is no way to tell if this will happen, but there have been an increasing number of signs that Facebook is going in this direction.

All of these public technology companies face some serious fundamental questions and issues, and the resolution of these questions and issues will determine the long-term success or failure of these technology companies as public entities. The questions surrounding these companies mainly relate to basic business issues such as the long-term viability of their business models and their ability to establish and maintain sustainable and profitable business operations over time. Even though investors
Continue Reading Technology IPOs – Where Do We Go From Here?

NASDAQ recently filed a proposed rule change with the SEC. Upon taking effect, the rule will change the way total assets and shareholders’ equity are calculated for listing purposes on the NASDAQ Global Select Market. To conform with NYSE’s treatment under their comparable standard, NASDAQ proposes to delete the requirement that total assets be demonstrated…