Unicorn Fears and Stopping Stops
Welcome to a very special edition of people are worried about unicorns.
They really are! The most worrying unicorn of them all, Square, went public last night at $9 per share, below its $11 to $13 marketing range. That gives it a valuation of $2.9 billion, not even a tricorn, and a sharp fall from the $6 billion sexacorn valuation that it got in a private financing last year. "The difference between the two may be seen as a sign that the market for venture-backed companies has reached too high."
Or not. It may just be a sign that Square wasn't worth $6 billion. Even that could have broader implications. Your model of private financing might have been that, no matter what unjustified valuation a company gets in the private market, it will get a higher valuation in its initial public offering. You might have thought that the illiquidity of private markets meant that public shares would always be worth more, or that venture capital investors would always be more conservative than public investors, or just that there'd always be a greater fool somewhere. If that was your model, then you will need to revise it after Square. I am not sure that was a prevalent model, though?
Speaking of sexacorns, yesterday the Evening Standard published an interview with Sean Rad, the chief executive officer of Tinder, which is not technically a unicorn but whatever. Mostly the interview is the sort of tech-bro nonsense you'd expect (tech is "like the new rock," "I don’t care if someone is a model," etc.), but it is distinguished by two critical errors. One -- and this one probably isn't Rad's fault -- but the article mentions some statistics about Tinder's user engagement. And those statistics are, according to Tinder's parent company, Match Group, Inc., wrong. This is awkward because Match Group has filed to go public and is currently in a "quiet period" in which it is not supposed to go around marketing the offering. And Rad's interview could be interpreted as a violation of the quiet period. The consequences of this are not too draconian -- Match filed the interview, and its own disavowal of everything Rad said, as a free writing prospectus -- except for Rad's other mistake, which was this:
He continues: “Apparently there’s a term for someone who gets turned on by intellectual stuff. You know, just talking. What’s the word?” His face creases the effort of trying to remember. “I want to say ‘sodomy’?”
So now that's in Match Group's public securities filings for all time. The almost-word he's thinking of is "sapiosexual," an even weirder move. Anyway don't do any of this. Don't say "sodomy" unless you're sure you mean it, don't call yourself a sapiosexual even if you get the word right, don't give interviews during an IPO quiet period, don't found Tinder, all of it, just don't.
The unicorn massacre continues. Lyft is having a rough tyme, "raising roughly $500 million as the company burns through tens of millions of dollars a month," with "tepid financial performance" that "has repeatedly underperformed its own expectations." And "startups in Berlin, London, Paris and Stockholm are typically much cheaper than in the U.S.," which could disrupt the unicorn industry. "This isn't a bubble bursting exactly," writes Bloomberg Gadfly's Shira Ovide, "but more like air slowly escaping from the balloon."
And here is a really interesting article about unicorns facing the harsh spotlight of public markets, not because they've IPOed, but because they've privately sold shares to mutual funds and then found out that those mutual funds are a bit more exhibitionist than the average venture capital firm:
Dropbox got a shock recently when Fidelity Investments and BlackRock wrote down the value of their investments in the company by at least 15 percent this year. Fidelity also marked down its stakes in Snapchat, Zenefits, and other closely held technology companies, according to data from research firm Morningstar. The disclosures, which were made in routine regulatory filings, surprised Silicon Valley. Not even many of the companies were aware that certain investors regularly adjust the value of their holdings and report the estimates publicly, say people with knowledge of the situation, who asked not to be identified.
The Valley initially welcomed Fidelity, BlackRock, and other big money managers, because they could afford to throw around the amounts of cash that oversized tech startups needed. More transparency was an unanticipated consequence. “They’re sort of semipublic companies now,” says Matt McIlwain, a managing director at Madrona Venture Group. “It’s an awkward space to be in.”
My general view has been that private markets are the new public markets, and that raising billions of dollars from big institutional investors without going all the way to being public (public disclosure, free tradeability, etc.) is a perfectly reasonable evolution of the capital markets. But that doesn't mean you can access public-market investors without being changed at all. Here is Fred Wilson on "The Blurring Of The Public And Private Markets."
Also, here's a handy general template for worrying about unicorns.
People have been worried about stop orders for a long time, because they intuitively seem to add to market volatility, particularly on rough days. You set a stop to sell your stock when the price plunges, and then the price plunges, then all of a sudden you have a market sell order just when no one else is buying. So the stock plunges some more, and you end up selling for way less than your stop price. "Stop orders are like land mines." This week the New York Stock Exchange, embarrassed by the blow-ups, announced that it "will no longer accept new Stop Orders and Good Till Cancelled ('GTC') Orders beginning February 26, 2016." There is some tsk-tsking on Twitter about how this is a sad abandonment of the American ideal of freedom and personal responsibility, as though proper handling of stop orders is a sign of moral virtue and a rite of passage into adulthood. But no one seems to disagree with what I take to be NYSE's main premise here, which is that stop orders are kind of dumb and keep getting people in trouble. Also they are not used very much, so this doesn't seem like a huge loss.
Elsewhere in market structure, people have long been worried about dark-pool transparency, in part because dark pools keep getting in trouble for doing weird creepy non-transparent things. So the SEC is proposing new rules that would require each dark pool "to file detailed disclosures on newly proposed Form ATS-N about its operations and the activities of its broker-dealer operator and its affiliates." Here is more from Bloomberg, which notes that "Many of the new disclosure requirements sought by the SEC mirror those currently reserved for public markets such as The New York Stock Exchange."
How many drug mergers can there be? Valeant tried to buy Allergan, and then Actavis bought Allergan, and then it changed its name back to Allergan, and now Pfizer is apparently trying to buy it, "valuing the Botox maker at as high as $150 billion in what would be the drug industry’s largest-ever deal." (Though Bill Ackman still dreams of an Allergan/Valeant deal.) The deal seems to be pretty tax-driven -- Pfizer is a U.S. company, Allergan is Irish, you know how it is -- and so is at some risk because of new "plans by the U.S. Treasury Department to deter companies from doing deals to move their headquarters abroad for tax purposes." "We will continue to review our existing authorities to identify additional ways to address this serious problem," says Treasury, but it also says that "Treasury cannot stop inversions without new statutory authority," so I guess if you're Pfizer the time to invert is now. Here is Aswath Damodaran on the valuation of a Pfizer/Allergan deal and "the absurdity of US tax law."
Elsewhere in regulatory obstacles to mergers:
Take Office Depot Inc. The company’s stock trades 29% below the price Staples Inc. agreed in February to pay for its smaller rival. The gap has doubled since April, reflecting growing investor worries that antitrust regulators will block a deal to combine the country’s two biggest office-supply chains.
Cigna Corp.’s stock is 22% below the value of Anthem Inc.’s $48 billion offer, while oil-field-services provider Baker Hughes Inc. trades 17% cheaper than the price of its pending $35 billion sale to Halliburton Co.
The wide spreads seem to be driven by regulatory worries, and the simplistic model is that a merger boom starts small but has to snowball bigger and bigger, in part because that's how booms work but also because, you know, all the small companies have bought each other and are now big. As deals get bigger and industries get more concentrated, antitrust law puts a cap on how long the boom can run for, and that shows up in merger arbitrage spreads.
Elsewhere, "Martin Shkreli, the brash pharmaceutical executive whose abrupt fiftyfold increase in the price of an old infectious disease drug sparked an uproar, has acquired a majority of the shares of a publicly traded biotechnology company that was about to go out of business," and I'm sure he won't do anything controversial with that.
Yahoo activist shareholder Starboard Value, which pushed Yahoo to spin off Alibaba, is now pushing it not to:
While Starboard also continues to believe the spinoff shouldn’t incur taxes, the letter says, it no longer feels comfortable with the risk that it will.
“If you stay on the current path, we believe the potential penalty for being wrong is just too great,” Starboard wrote.
It seems a bit unsporting that the Internal Revenue Service might be able to block this spinoff without ever proving that it's taxable, or even arguing that it's taxable, or even indicating that it thinks that it's taxable. The spinoff sure looks tax-free under current law, so the IRS won't tell Yahoo not to do it, but it's hoping that it can have the same effect by just keeping very quiet. That might be right!
A conversation between Tyler Cowen and Cliff Asness.
Even the most insane billionaire cannot afford a hundredth of what frigging Tony Stark or Bruce Wayne have. It’s infuriating.
I’ve done well. I’m not the most insane out there. But if I wanted to go build a Batcave at my house, it would take approximately 600 times my wealth, and everyone would know about it.
But there is also a lot of good stuff on hedge funds and market inefficiencies and human behavior. Also this on living in Greenwich:
I live in Greenwich, Connecticut. In some parts of the world, if you said, “my daddy runs a hedge fund,” I’d say, “what’s a hedge fund?” In Greenwich, Connecticut, the kids say, “what kind of hedge fund is your daddy running? Is he event arbitrage? Trend following? What does dad do?”
Incidentally one of Asness's Greenwich neighbors appears to have built a Batcave at his house.
People are worried about swap spreads.
People are worried about bond market liquidity.
I wrote about last look.
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