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Wall Street IPO bonanza stirs uneasy memories of 90s dotcom mania

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The frenzy surrounding Airbnb’s Wall Street debut began hours before the first trade. As bankers worked to establish an opening price, the number of options contracts changing hands in robotics maker ABB skyrocketed. The apparent flub came down to a single letter: ABB was missing an N in its ticker that would otherwise denote Airbnb.

The rush into ABB was quickly overrun by an avalanche into Airbnb, which more than doubled in value on Thursday in a return to the kind of mammoth pops that came to define the dotcom boom of the late 1990s. By the end of the day, Airbnb was worth $86bn — on par with Goldman Sachs, the bank that helped usher it to market.

The renewed fervour for a piece of highly valued technology IPOs has stirred unease for many investors who remember the dotcom bust with trepidation. Only three other companies raising at least $1bn in the US have climbed more on their first day than Airbnb — and the trio did so between March and June 2000, according to Dealogic. The group included Palm, maker of the PalmPilot mobile device.

“We’ve all been around markets for enough time to know this doesn’t end well,” said Jim Tierney, the chief investment officer of concentrated US growth at AllianceBernstein. “It’s a sign of frothiness, a sign of incredible demand, a sign of a retail investor that . . . just wants to get in.”

The scramble for shares of Airbnb, as well as the buying spree in DoorDash earlier in the week, starkly contrasted with the reception big privately held companies received for much of 2019 when high-profile debuts from the likes of Uber and Lyft were met with investor apathy. Others, including the pitched-then-aborted float of WeWork, faced intense scrutiny from money managers who questioned how bankers reconciled their multibillion-dollar valuations with lossmaking operations.

Bar chart of Change on first day of trading (%) showing Dazzling 2020 debuts beaten only by dotcom-era IPOs

The listings have accompanied a rally in technology shares this year after the Federal Reserve and US government unleashed unprecedented stimulus to stymie the economic fallout of the pandemic. It is one of the reasons that investors have been willing to snap up shares in the debuts of these tech businesses, even when their valuations have appeared increasingly untethered from norms, bankers and asset managers said.

Retail investors have supercharged the gains in the $42tn US stock market, piling into equities and moving markets in ways last seen before the Nasdaq crashed in 2000. And they have left a mark on IPOs, bidding shares of newly listed companies ever higher, said Michael Baumann, a syndicate trader at Fidelity. Their presence, which was mostly absent last year, is a factor that large money managers now contemplate with when placing orders for IPOs.

“You have institutional investors doing extreme diligence on these companies and putting together a valuation framework and then the debut comes and you have these euphoric after-market results,” he added. “We don’t think that is driven by the institutions.”

Companies have tapped the demand to raise a record $149bn through initial public offerings in the US this year, according to Refinitiv. That has included an unprecedented seven consecutive months of $10bn-plus flotations. Even when excluding a boom in blank-cheque companies, the IPO spree is running at its fastest pace since 2014 despite new listings slowing to a standstill in March when the pandemic sent markets into a tailspin.

Column chart of Proceeds raised ($bn) showing US IPO boom reaches new heights

Sharp gains for big technology shares this year provided a boon to privately held groups when they held their virtual IPO roadshows.

Investors came in droves when cloud-company Snowflake went public in September, betting that it would take advantage of businesses moving their operations online. Its stock more than doubled on its debut; even Warren Buffett’s Berkshire Hathaway, long known for its love for a good bargain, bought in. A similar narrative played for DoorDash, which benefited from the boom in food delivery.

Line chart of Total fund assets of the Renaissance IPO exchange traded fund ($m) showing Investors race into fund tracking newly-listed companies

Airbnb, which allows users to rent out their homes to travellers, marked a turning point for investors given its business, unlike many tech companies, was still battered by the pandemic. Money managers are now betting global vaccine rollouts will help companies hardest hit by the pandemic outlast the downturn, including those in the travel and hospitality industry.

The deluge of new issuance is expected to continue next year, according to bankers. Robinhood, the retail trading app that has helped foster a new generation of day traders, is at work on a flotation that could come as early as next year, people familiar with the matter said.

Jane Dunlevie, co-head of global Internet investment banking at Goldman Sachs, estimated that there were still hundreds of large upstart companies on the sidelines including more than 70 that were worth more than $5bn.

“The super cycle will continue,” she said. “The impact that tech companies have has probably never been greater. Covid in particular has accelerated some businesses but it has also battle tested some that have emerged stronger.”

There are signs investors are already following the gains, with fund flows building rapidly for a Renaissance Capital exchange traded fund that invests in IPOs.

“When the IPO market is wide open, after-market trading can get frothy,” said Matt McLennan, head of global value at First Eagle Investments. “It is an expression of investors’ confidence and there may be too much confidence at the moment.”



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India tech IPO boom to provide crucial test of investor appetite

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Indian business & finance updates

Food delivery app Zomato has kicked off a flurry of stock market debuts by Indian start-ups that hope crackdowns on Chinese technology groups could prompt global investors to turn their attention to India’s tech offerings.

The $1.25bn initial public offering of Zomato in Mumbai, which launched last week, is expected to be followed in the coming months by the $2.2bn listing of Paytm, a payments and financial services app that has come to symbolise the excitement surrounding India’s digitalisation. Paytm and Zomato are both backed by Chinese billionaire Jack Ma’s Ant Group, while the former counts Japan’s SoftBank as an investor.

The IPOs arrive as investors become increasingly bullish on India following Beijing’s targeting of China’s internet groups. Ride-hailing business Didi was hit with a regulatory probe days after it raised $4.4bn in a New York IPO, sending shares of big Chinese tech stocks plummeting.

Bankers said the Indian listings represent a coming of age for the nation’s tech start-ups, where cash-burning businesses have until now been funded solely by private investors. However, some analysts have raised concerns that India’s equity markets are overheating and warned of regulators potentially targeting the sector. Investor demand for Zomato’s IPO outstripped supply by 32 times as of Friday.

“There’s a clamour for it, people have limited avenues to invest in Indian tech right now,” said Ausang Shukla, managing director of corporate finance at brokerage Ambit.

“Founders of fierce competitors of Zomato and Paytm, even they want the IPOs to be successful,” he added. “If they bottom out then the entire sector gets a bad name.”

Zomato and rival Swiggy, the two dominant food delivery players, have come to embody the breakneck growth of Indian tech start-ups. Both have used heavy discounts to expand into hundreds of cities, and orders were turbocharged during the Covid-19 pandemic, as lockdowns confined Indians to their homes. Nonetheless, Zomato reported a net loss of $100m in the year to March.

Zomato and Paytm could be joined in the public markets by Flipkart, an ecommerce group that is backed by US retailer Walmart and competes with Amazon in India, after it raised $3.6bn this month, giving it a $38bn valuation. Insurance aggregator Policybazaar, beauty retailer Nykaa and logistics company Delhivery have all indicated that they will list soon.

“India’s tech IPO boom has been long-awaited — there are some world-class businesses in the pipeline,” said Udhay Furtado, co-head of Asian equity capital markets at Citigroup. “There is clearly a global appetite . . . we are seeing investors from all corners of the globe including several who have not been active in the local Indian market before.”

Column chart of IPO proceeds in first half of each year ($bn) showing India listings are set for their biggest year since 2008

Zomato’s IPO is expected to give it a valuation of $8bn, while Paytm’s mooted $25bn market capitalisation would place it among India’s top 25 biggest companies.

Losses at both companies have not deterred investors, said Neha Singh, founder of data provider Tracxn in Bangalore. “In India, the expectation was that you become profitable and then you do the listing. That’s changed,” said Singh. “Markets are at an all-time high, so people want to take advantage.”

The listings coincide with a broader rush by Indian companies to tap public markets even as the economy suffers after a brutal second wave of coronavirus. The 37 businesses that listed in India in the first half of 2021 raised $3.9bn, according to Refinitiv data, the most since the global financial crisis. The benchmark Nifty 50 index has risen 13 per cent this year to a record.

For Zomato, investors hope the company will prove to be India’s answer to Meituan, China’s largest food delivery platform that turned profitable in 2019. Paytm has billed itself as a superapp with the potential to become India’s Alipay, Ant Group’s online supermarket of financial offerings.

Like its peers, Zomato has sucked up market share in India’s vast informal economy as lockdowns pushed more business online. But analysts question whether the boom will last.

Jefferies said it was a “critical investor concern” whether food delivery in India could be sustainably profitable in the long run, given that order values remain well below those in China or the US. “While there are a lot of questions on the minds of investors . . . the FOMO factor should keep the excitement level high,” the investment bank wrote.

Like in China, regulatory uncertainty is a risk in India as the government introduces legislation designed to give it more control over the data of its 1.4bn people.

“India’s regulators have had somewhat fickle views of the role of tech in the financial industry especially when dealing with foreign players,” said Zennon Kapron, director at Kapronasia, a regional fintech consultancy.

For Zomato and other start-ups about to hit the market, they will be hoping investors give them the benefit of the doubt.

“Zomato is the first one off the block, so it has to do well,” said Samir Arora, founder of Helios Capital, an investment group. “Zomato is a unique thing and Indians like unique things in the market,” he added. “It’s lossmaking, but it’s not obscene.”



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Robinhood seeks valuation of up to $35bn in IPO

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Robinhood updates

Online brokerage Robinhood is seeking a valuation of up to $35bn in its initial public offering, one of the most hotly anticipated stock listings of the year.

Robinhood is offering about 55m shares of its class A common stock at between $38 and $42 as it seeks to raise more than $2.3bn, the company said in a filing with the US Securities and Exchange Commission on Monday. The founders and chief financial officer are offering about 2.6m of the shares.

Thirty-five per cent of the company’s IPO shares will be available to retail traders, the company said. Robinhood plans to list its stock on the Nasdaq under the symbol “HOOD”.

Robinhood had been targeting a valuation of at least $40bn in the IPO, the Financial Times previously reported.

Goldman Sachs, JPMorgan Chase and Citigroup are among the banks underwriting the deal.

The Bay Area-based broker became synonymous with the recent surge of retail investing by day traders. Its registered users have doubled since the start of 2021 to 31m.

Robinhood’s total revenue grew 245 per cent in 2020 from a year ago to $959m. It also reported net income of $7m, compared with a net loss of $107m in 2019, according to the SEC filing. The company estimated it had 22.5m funded accounts, which are tied to bank accounts, as of the end of June, up from 18m at the end of the first quarter.

Robinhood’s mission to “democratise finance for all”, with no commission fees and an easy-to-use interface, has drawn a new demographic of young investors into markets. The median age of users is 31, younger than those at rival US brokers such as Charles Schwab or TD Ameritrade. The company says more than half of its customers are first-time investors.

Robinhood, which offers both equity, derivative and cryptocurrency trading, has also come under scrutiny by lawmakers and regulators as its popularity has grown. It has been criticised for practices such as “payment for order flow”, from which Robinhood derives the bulk of its revenue, and gamifying investing into a “casino”-like experience.

In late June, the US Financial Industry Regulatory Authority levied a $70m penalty against Robinhood for causing what it described as “widespread and significant harm” to customers.

The IPO valuation is of particular importance to investors who bought convertible notes issued in February, when Robinhood raised emergency funds to meet its obligations to clearing houses during the height of the GameStop trading mania.

These notes will convert into equity at a discount of at least 30 per cent to the offer price. For the most senior debtholders, the conversion is capped at a valuation of roughly $30bn.

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Pershing/UMG: Dance to the music of time

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Bill Ackman updates

Hold off the requiem. Regulators may have forced Bill Ackman to scrap plans to acquire 10 per cent of Universal Music Group via his Spac, but the deal lives on. Rather than investors in Pershing Square Tontine Holdings receiving UMG shares, plus an extra $1.6bn cash left to spend, and warrants, shares in the record label will go into Ackman’s Pershing Square hedge fund.

The original deal had kerbside appeal. Unlike many other Spac deals, there was no dilution from free founders’ shares. It gave those investors access to a resurgent music label on a slightly cheaper multiple than rival Warner Music. Vivendi, UMG’s current owner, plans to list the shares in September so buying in via Ackman’s Spac would have given investors a cut-price backstage pass.

True, an implied enterprise value of €35bn exceeded the €30bn accorded to a similarly sized acquisition by a consortium led by Chinese tech giant Tencent just six months earlier. But it was comfortably shy of the €40bn or so pencilled in by optimistic brokerage analysts. JPMorgan, unsurprisingly home to Ackman’s favourite analyst, put the figure as high as €50bn. On those numbers — $20.20 per share, a shade below PSTH’s current share price — the RemainCo cash and warrants would come cheaply.

Buying Vivendi, which plans to disburse shares of UMG on Amsterdam Euronext via a special distribution, means rump assets have an uncertain value. Citi analysts put this above €14 a share. UMG distributed as a dividend in kind also attracts withholding tax liabilities, to which some minorities, such as Bluebell, have objected. It has moaned about any previous tax advantages accorded to Ackman’s Spac purchase.

Pershing says it plans to remain a shareholder in UMG for the long haul. For a music industry that has cycled through myriad different musical genres and business models, this sounds bold. UMG has been the home of music idols from The Beatles to Lady Gaga and Taylor Swift. A groundbreaking Spac, it appears, was one revolution too much for regulators.

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