We generally think that a company whose stock jumps or pops on its initial public offering has made a successful entry to the public markets. This is not in fact so, not in an economic sense. What such a pop, like this of 44% in Mulesoft’s stock, actually means is that the bankers and advisers got their sums wrong. Those who were selling stock, whether directly stockholders, or early holders who held on through the IPO as the company sold stock, are now poorer than they would have been if the bankers had got their sums correct.
Yes, I agree, this isn’t how we normally think about it but then that’s because we’re, if we’re involved at all, involved as buyers of such IPOs. We think it’s just great that we get something for cheap but the sellers should be less happy.
The news itself:
MuleSoft shares popped more than 44 percent in their trading debut, putting the tech company on pace for one of the best first day gains of an IPO this year.
If you’re one of those allocated stock at $17 and you’ve just received that pop (not that you can normally do anything about it yet, you normally have to hold for 30 days) then you think this is just great:
MuleSoft, the second tech unicorn to go public this year after Snap , had an extremely auspicious start on Friday, opening trading at $25.02 a share, 47% higher than its IPO price of $17. In late morning trading, they retained that level and were up about 45%. The company priced its shares late Thursday, slightly above the top of its proposed range of $14-$16.
Note that I’m not saying anything at all about the company nor its sector. This is purely an economic observation:
“The most important thing about MuleSoft is there is strong interest in this IPO,” said Kathleen Smith, a principal analyst at Renaissance Capital, a manager of IPO-focused exchange-traded funds, in an interview this week.
The art and aim in selling something is working out who is willing to buy and at what price. Other things being equal one would obviously prefer to get the highest price possible. Because, you know, that’s the point of selling something, to end up with a pile of Benjamins which can be used to do something else. The bigger that pile the better you’re doing at selling whatever. It’s worth noting that this is an art though, this is not a science. Because we’re dealing with human beings here, their opinions, so the art is to gauge what people will pay in advance and then try to charge them that amount.
That art being of course what the bankers and advisers are for. Any specific company is likely to only ever have one IPO but the advisers do this for a living. That’s why they get their fat fees too (7% of funds raised is not unusual for an IPO). And if they price something so that it pops 44% at opening then that means that they’ve left a substantial amount of money on the table. The new stockholders are that much richer at the expense of the old. Sure, everyone wants a little rise but perfection would be a 1 or 2% rise in the price meaning that the advisers managed to extract the maximum amount possible for their clients. A pop like this should not therefore be seen as a success. Perhaps calling it a failure is extreme as they did manage to sell the stock and raise the cash which is the main point but it’s also not a success that so much was left there on that table.
The Failure Of Mulesoft’s IPO As It Pops 44% – Forbes