IPOs collapse to near-crisis levels even as stocks hover at record
It happens all the time now: On Monday, Salesforce, after trying to buy LinkedIn but getting outbid by Microsoft, bought the San Francisco startup Quip Inc., which has “about 40 people,” as the company says. Quip’s product is what it calls a “productivity platform for teams that allows them to be more connected, more collaborative and get more work done,” or what TechCrunch calls “a cloud-based word processing app.”
Quip was founded in 2012 by Bret Taylor (co-creator of Google Maps, CTO of Facebook, “responsible for the like button,” and now on the board of Twitter) and Kevin Gibbs (“led engineering and product at Google and brought Google’s App Engine to market”).
Given this sort of pedigree, Quip had VCs and other investors standing in line, wagging money: It raised $15 million in July 2013 and $30 million in October 2015. Among these investors was Salesforce Ventures.
Salesforce is now paying a ton of money for the rest of Quip. TechCrunch: “We understand from two sources very close to the deal that the total price is $750 million.”
This includes $582 million in Salesforce stock, plus the undisclosed current value of the investment Salesforce had made in Quip previously.
Quip will be the 9th company Salesforce has acquired over the past 12 months, according to CrunchBase, and the 41st since 2006!
They’re all doing it – publicly traded companies with inflated stock prices and a relentless passion for overpaying because they can: they use their inflated shares as currency of which they can print an endless number; and they use acquisition accounting to convert real expenses into “non-cash charges” that everyone is going to ignore.
Compared to some of the crazy deals a couple of years ago, $750 million for a company with “about 40 people” and an app sounds almost reasonable.
But as this corporate buying spree of startups continues, the IPO market has fizzled.
There have been 54 IPOs through July this year, down 54% from 118 deals during the same period in 2015, according to Dealogic. These IPOs raised $11.5 billion, down 50%. It was the worst year-to-date since 2009.
Lest we forget, 2015 had already been a down year: Compared to the same in period 2014, the number of deals and the amount raised have both plunged by about 70%.
Of the 54 IPOs, 23 were healthcare companies. Their 43% share of all IPOs so far this year is the highest on record, according to Dealogic. Another 11 were in finance. Only 9 were in technology.
Only two IPOs – Twilio and Line – have priced above range, down from 31 last year, the lowest year-to-date number on record. There simply isn’t a whole lot of appetite for overpriced and overhyped IPOs.
This year’s crop of IPOs has gained 16.7% on average, according to the Wall Street Journal, while the S&P 500 gained 6.2%. But in the first few weeks and months after an IPO, when hype rules and GAAP-based information is scare, Wall Street’s concerted efforts can drive shares to huge gains that later evaporate.
So over a two-year time frame, many IPOs haven’t fared well. The Renaissance US IPO Index, which tracks newly public companies for two years and imposes a 10% cap on the largest holdings (Alibaba, Citizens Financial, Synchrony Financial, Mobileye, and Axalta Coating), is down 3% year-to-date. It peaked in April 2015 and has since plunged 19%. For the past 12 months it’s down 16%.
Here’s the conundrum: a booming IPO market and a booming stock market go together. This is the period when the “IPO window” should be wide open, when just about anything would fly, when investors don’t pay attention and just count on the short-term IPO bounce. It’s when they’re ripe for the picking.
But this time, the S&P 500 has been breaking record after record, and valuations are by many measures silly. Yet IPOs have plunged to near-crisis levels.
This is another one of these out-of-sync movements that show that some underlying dynamics are seriously broken even while stocks keep floating higher despite quarter after quarter of declining revenues and earnings. These out-of-sync movements have become symptomatic for our era of central-bank market manipulations, zero- and negative-interest-rate policies, QE, and relentless financial repression: stock valuations have been surgically removed from economic reality, but other measures, such as IPOs, are once again sinking into that bog.