Corporate Financing Analysis - Snap Lock-Up Significant For US IPOs - 21 AUG 2017


All eyes were on the secondary market of the US equities arena last week. The hotly anticipated expiration of the Silicon Valley messaging app Snap's IPO lock-up period, following its USD3.9bn IPO completed earlier this year, has come and gone, and unsurprisingly there are a few lessons to be learned from it. In particular we highlight that, firstly, the worst case scenario has been avoided whereby a sharp slump in Snap's stock trigger a sudden pullback in US IPO sentiment among both issuers and investors; secondly, the deal has served as a reminder that stocks are overvalued, with tech companies, in particular, trading at unsustainable multiples and that the frothiness of valuations are becoming all the more exposed; and lastly, that tech's place in the IPO engine room may be beginning to wane somewhat, which is bad news for the US arena for new listings at large. Ultimately, the deal, which was the largest tech float to be recorded in the US since Chinese e-commerce giant Alibaba went public in the US with a USD25bn float, has given us reason to be believe that the US IPO bull run will not stall just yet, but at the same time it has also served as a timely reminder of why it will do just that in the not too distant future ( see, ' US IPOs Continuing To Enjoy The Bounce While It Lasts, May 10 2017).

Worst Case Scenario Avoided

US IPO activity has been on a charge during 2017, but has slowed as we have moved along into H217, with July's tally of just nine floats representing the slowest July for activity since back in July 2009, and the first month in 2017 to come in below the prior year period in terms of deal volume - this was even after those floats were priced at an average of 9% below the midpoint of their indicative price ranges. Furthermore, the pipeline of deals for August looks especially thin, with the number of filings last month down to their lowest July since way back in 2003 - although, we do acknowledge that a summer hiatus is common around this time of the year. Against this quieter backdrop, the expiration of Snap's lock-up period - when an additional 400mn shares in the company became freely tradable - held even greater bearing on the US IPO outlook, in our opinion. Indeed, with all bar 50mn (those shares remain subject to a one-year lock-up) of Snaps' stock set to become freely tradable, it was widely expected to put downward pressure on the firm's share price, which has struggled since the firm went public in Q117 and remains well below its offer price. While that has certainly proven to be the case, we highlight that the amount that the price fell by on the New York Stock Exchange was not nearly as harsh as many had predicted. After trading down by 5% during intraday trading on the expiration of the lock-up, by the closing bell on July 31 the stock was down by just 1.01%, which we see as a bottoming, rather than a bottoming out of the stock.

Snap Not Unique
Ten Largest Tech IPOs Since 2012, By % Return
Source: Renaissance Capital, BMI

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