Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
What to Expect at a Critical Stock Market Point: End of a Wave 2 Rally - 26th Apr 18
A New Lithium War Is About To Begin, Modern Gold Rush! - 26th Apr 18
Silver, silver, and silver! There’s More Than Silver, People! - 26th Apr 18
How to be Financially Prepared When Purchasing Your First Home - 26th Apr 18
Is a Stock Market Crash Imminent or Does this Stock Market Bull Still Have Legs - 25th Apr 18
Gold Price Focusing on May Cycle Bottom - 25th Apr 18
Cash “Vanishes” From Bank Accounts In Ireland - 25th Apr 18
Is the Malaysian Economy a Potemkin Village - 25th Apr 18
Land Rover Discovery Sport Rattling / Knocking Sounds From Car Pillars - 25th Apr 18
China Takes the Long View on Gold-Silver... and So Should You - 25th Apr 18
Russia Buys 300,000 Ounces Of Gold In March – Nears 2,000 Tons In Gold Reserves - 24th Apr 18
Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - 24th Apr 18
CRYPTOCURRENCY MASTERCLASS #CRY90 - 24th Apr 18
UK Gambling Statistics - What the Numbers Say - 24th Apr 18
Chaos Capitalists Short Countries - How Chanos Got China Wrong - 24th Apr
Artificial Intelligence Defines the Political News Narrative - 24th Apr 18
Stock Market "Oops, They Did It Again" - 24th Apr 18
Fox in the Henhouse: Why Interest Rates Are Rising - 23rd Apr 18
Stocks and Bonds, This is Not a Market - 23rd Apr 18
Happy Anniversary Silver Investors! - 23rd Apr 18
The Hottest Commodity Play In 2018 - 23rd Apr 18
Stock Market Correction Turns Consolidation - 23rd Apr 18
Silver Squeeze, Gold Fails & GDX Breadth - 23rd Apr 18
US Economy Is Cooked, the Growth Cycle has Peaked - 23rd Apr 18
Inflation, With a Shelf Life - 23rd Apr 18 - Gary_Tanashian
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Wall Street Stock Market Syndicate Still at Work

Companies / IPOs Mar 09, 2017 - 02:55 PM GMT

By: Rodney_Johnson

Companies Maybe they benefited from divine intervention… or maybe they were just lucky. Either way, the students and staff of St. Francis High School in Mountain View, California must be pretty happy right now.

In 2012 the school took a chance, investing $15,000 in a small, little-known app maker called Snapchat. Last week the school sold two-thirds of its shares for $24 million when the stock went public. I’m sure they’re still giving thanks.


Other people took home some dough that day as well. The co-founders, Bobby Murphy and Evan Spiegel, both cashed out $272 million. Their remaining shares make them both members of the billionaire’s club.

All told, the company sold 145 million shares and insiders/early investors sold 55 million shares. The company netted around $2.4 billion to fund expansion and operations, while the individual sellers walked away with the remaining $1 billion.

This part of the story is fun, but it can’t hold a candle to the folks that really got away with all the cash… the syndicate.

The early investors and insiders took a chance on a company that currently generates revenue, but hemorrhages cash. In 2016, Snapchat brought in $404 million and lost $515 million. And there’s no end in sight.

For the uninitiated, Snapchat is essentially a photo- and video-based social networking service. It’s a hit mostly among teenagers and millennials, but parts of other demographics have caught on too. Direct messages, or “snaps,” disappear forever after someone views them. The app also has group chat and story features, and many big media and publishing brands have their own channels within Snapchat.

The company has 158 million daily users, so clearly those involved think there’s a way, perhaps somewhere in the distant future, to turn those eyeballs into dollar signs.

Stock investors that bought shares the day of the IPO also see some hope. The shares priced at $17, but opened at $24. Those buyers who were allocated shares in the IPO before trading opened earned a cool 40% instant profit.

Which brings us back to the mob, er, syndicate.

Long ago, in a galaxy far away, I worked on Wall Street. I learned the ins and outs of investment firms and eventually landed on a bond trading desk. Equity IPOs were part of the learning curve. We had to know how all of it worked.

Back then, attractive private companies – like Snapchat – would interview investment firms and choose a lead underwriter, who’d then put together a syndicate of investment firms to file all the paperwork necessary and handle the initial public offering of shares.

To fetch the highest price, the syndicate would go through the expensive, time-consuming process of generating sales material about the company and then holding dog-and-pony shows around the country to highlight the coming offering. This all culminated in the day of the offering, when the company and the underwriters found out if their marketing efforts were going to pay off.

For this effort, the syndicate of firms earned an eye-popping fee that could run between 5% and 10% of the funds raised. I can’t say the fee earned was in line with the efforts. It always seemed extravagant. But now, things are wildly out of proportion.

On Snapchat, the underwriter charged a “modest” fee of 2.5% of the funds raised, which works out to a mere $85 million. But, as they say in late-night TV ads, “Wait, wait! There’s more!”

In addition to this upfront fee, the underwriters have a 30-day option to purchase 30 million shares at the IPO price of $17, minus an underwriter’s discount. So not only do the mobsters, er, investment bankers, earn the difference between the current price of the shares and the IPO price, they also get an additional break.

At the close of opening day, this would have been at least an additional $210 million, bringing their IPO fee to a nifty $295 million.

Now, let’s review the heavy lifting that Morgan Stanley and Goldman Sachs had to do to snatch this fee from Snapchat. They had to file all the documents required by the SEC, verify holdings of early investors, map out the number of shares the company and insiders would sell, and gauge interest from investors to determine the appropriate price for the shares.

A handful of associates with working knowledge of SEC filings and telephones could have done all of these things

What syndicate members didn’t have to do was introduce anyone in the investment world to Snapchat. The app store on everyone’s smartphones handled that. So the most time-intensive, personality-driven part of the process, the marketing of the company and selling shares to potential investors, was done for them.

And yet they earned almost $300 million. What a job!

These firms will go to great lengths to explain how much groundwork they had to lay ahead of the IPO, and how their research departments will support Snapchat in the years to come. But all that masks the real reason that companies, even ones that seem the newest of age like Snapchat, still use Wall Street. They’re scared that investment bankers will give them the cold shoulder if they cut them out.

If a company goes public without prominent underwriters, it risks such companies refusing to follow the stock in their research department, which precludes the clients of the investment firms from buying the stock.

And then there’s the matter of getting loans from these companies later, or further rounds of stock sales. Essentially, if companies don’t play ball, Wall Street can put financial hurdles in their way for years to come.

It sounds a lot like another syndicate… the one that controls the docks, garbage pickup, and cement in New York.

I’m guessing Murphy and Spiegel, the co-founders, don’t care. They did walk away with more than a quarter of a billion dollars in cash, after all.

But this is one more area, like politics, where I thought the internet was going to dramatically reduce the influence of money. I thought information would flow so freely as to cut out the middlemen, resulting in lower fees and greater access across the board.

That might be true one day, but the Snapchat IPO proves that today it still pays to be a member of the syndicate.

Rodney

Follow me on Twitter @RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2017 Rodney Johnson - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Rodney Johnson Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules