The underwriter provides value by being _one_ convenient transaction to sell my company's shares. Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. The investment bank then wires me the money and I get to concentrate my efforts elsewhere (like the product) instead of fundraising. (Damnit Jim I'm a tech CEO and not a hedge fund portfolio salesman!) The investment bank is now on the hook for selling the shares to those 1000 investors. Also, the investment bank has the prestige and the rolodex of potential buyers. For me (say a young 20-something) to replicate that would require many golf games and champagne dinners that take my time away from improving the product. Saving me time is worth something, right? (Maybe not a 3% underwriting fee but it's definitely worth something.)
Cutting out the underwriter also means I leave "money on the table" because many investors would rather buy initial shares from a reputable intermediary like Goldman Sachs rather than a startup like me.
If you as a company, prefer to _do_ the same investor relationship work that underwriters do, by all means, skip the underwriter fees.
> Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch.
Well in an ideal world, companies shouldn't have to haggle at all -- a public auction should determine the IPO price. Or better yet, companies should be able to just submit sell orders as they see fit, without being required to make any volume or price commitments beforehand.
An IPO is (usually) for a small amount of a company (5-10%) - hence the term "initial". Once the stock is traded, the market is continuously setting prices (essentially a continuous auction) and companies are able to sell more stock if they so wish. The reason IPOs are not also auctions (or market priced) is because that model has been tried and it doesn't work.
Google's IPO auction famously just scraped the low-end of its estimate (after the range was revised down). It "popped" 18% on its first day of trading which - at very best - shows that dutch auction is no better than underwriting.
According to https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ "the mean average of all 21 [auction IPO] opening-day gain[s] was 1.25 percent". So it seems like Google was an anomaly, but Dutch IPOs in general are not leaving much money on the table compared to traditional IPOs.
> (Maybe not a 3% underwriting fee but it's definitely worth something.)
That's a good point, and applies to all of the previous poster's examples. Does your underwriter work 10x as hard to underwrite a 1B IPO than a 100M IPO? Is it 10x harder for a realtor to sell a $1M house than a $100K house? Does Visa work 10x harder on processing a $100 payment than it does on a $10 payment? It's crazy that these "services" charge a percentage of the transaction price. Why don't these guys get paid by the hour like most professional services? I'd love to get paid a fixed percentage of the price of the products that I work on, but that's ridiculous!
That seems rather like someone is going to eat "the loss" than "providing value for both guys". The stock market is the mechanism that provides value for the buyer and seller.
If you are selling before any price discovery is on, you are either getting screwed; or your investors are. If the investment bank could figure out the right price for the shares, why have the stock exchange in the first place.
>The stock market is the mechanism that provides value
If this was true in every circumstance, please consider why "market makers"[1] exist within the NYSE and London stock exchanges. If the stock market itself provides the value, buyers and sellers should find "market makers" redundant with zero value-added -- but that doesn't happen.
Therefore, I propose that one doesn't compare investment bank IPO underwriters to a naked stock exchange. Instead, compare the underwriter to a "market maker". The underwriter can be seen as the first market maker for the initial offering. That's worth something to many owners of companies looking to get liquidity.
They are completely orthogonal. A market maker provides immediacy. Not all parties in a market want to trade at the same time. The market maker provides the service of immediacy, which they charge for. You are free not to use their service. You can place your own resting order, you can use an intraday cross, or a an opening or closing cross to access liquidity. You could also execute a block trade through a bank. You could use a dark pool. Or you could use some combination of all of them.
The underwriter is like a market maker only in the fact that it is taking principal risk when it purchases the shares. It typically already has buyers lined up for all the shares and it does not face risk from the price changing between when the IPO is priced and trading starts. That is not to say that the bank is not without risk. It has obligations like price support for the IPO.
They're useful if you don't want to deal with individual tenants, ever, and just want to treat any issues that arise as an expense. Otherwise, you have to be prepared to treat a rental as a part-time job.
(That said, they can also be terrible.)
> Title/Escrow company in a home sale
Escrow seems like a critically valuable service. It shouldn't be as intertwined as it is with a pile of other services, but I wouldn't want to do without it.
I don't think I've ever seen a longer list of arbitrary fees than when I signed all the paperwork when buying a house. It felt like death by a thousand cuts with dozens of little $50-500 line items that seemed so arbitrary. When I would ask about them, I basically got told, "do you want the home or not..."
title checking can also be very important, because you don't want to fork over hundreds of thousands of dollars and then have the sale be invalidated because of title issues years down the road. Depending on what state you're in, this can be a non-trivial process to figure out.
Because most home purchase happen on the order of decades. A large percentage of property being purchased has titles that go back 50 years or more. Understanding who bought what when with what covenants using what surveys etc... isn't a straightforward task.
o_O what, your country/state/whatever jurisdiction doesn't have a title office?? Both Hungary and Canada (I am a citizen and real estate owner in both) has a title office where I can request the title online and it has a complete, official history.
Edit: Thanks for the downvote(s), care to explain where I am wrong?
Title transfer is more complicated than simply trusting what's listed on a document. Property, covenants, business/family arrangements and other factors change over time. All of this needs to be checked as part of the sale (or at least should be).
Respectfully: what the...? The title in the title office (or whatever else they call it) is the official truth. If someone, say, has a right to use the property until their death, that's a note on the title, not a piece of paper on the drawer. If it's not on the title, no one cares about your business or family agreement. If you contest the title based on such an agreement in a court of law you will always lose, in the most literal sense of the word, the title is all there is. I do not understand a word of what you are saying. What's going on in the USA?
When you take into account titles can have multiple leins, land can change, covenants can change, legal entities can come and go (divorce, death, business closure), banks come and go and debt is sold and a whole host of things up to and including outright fraud, simply relying on the title is often enough, but sometimes not.
Case in point, I just bought some land that I intend to build on. There was an easement on the original lot before it was subdivided. That easement was never updated to reflect the new subdivided properties. It didn't need to be, because it only applied to structures on the land, of which there were none. Due the way the covenants work for the county, where this easement was placed (my lot of the neighbors) would determine whether I can build a house on the lot. This was discovered during the title search and we had to get the county to make a decision, which required zoning consulting with a judge, before we could purchase the property.
Had I purchased this lot without a title search, I could have went ahead with financing construction and perhaps even broken ground, before this was discovered. Even planning and zoning missed it originally. Additionally, given that this was technically a dispute, if I had not done this due diligence, it's entirely possible the neighbor could have made a case for the easement and I would have been stuck with a court case which is always a gamble.
Trust me, I do a lot of real estate on the side and the few hundred dollars you pay for title insurance is well worth it when these types of issues come up. The last thing you want to deal with is going to court with your soon to be neighbors over property line, easement, covenant etc... disputes after you've already purchased the property and are forced to live with the consequences (best case your neighbors hate you, worse you're stuck with a dud property). It's a small price to pay for what is likely the largest purchase you'll make.
When I paid-off my mortgage in the UK I was disappointed not to receive the title deeds on paper.
In the past few years the land registry agency here has been encouraging lenders to scan-in old documents and destroy the paper originals, so the only active indication of ownership is a record in a database. They call this 'dematerialisation'.
I can only hope they have an excellent versioning and backup strategy.
Escrow is a valuable instrument, but there fees charged for it today is unwarranted.
In the future, escrows will be handled by smart contacts for a lot cheaper, not people.
As for property manager, with the surfeit of online tools for everything from listing, screening tenants to rent payment, their value is significantly diminished
> Escrow is a valuable instrument, but there fees charged for it today is unwarranted.
Agreed.
> In the future, escrows will be handled by smart contacts for a lot cheaper, not people.
Seems exceptionally unlikely. That doesn't work unless all the infrastructure they interface with all uses the same underlying resolution system; otherwise, someone has to provide a bridge, and that makes the "smart" contract effectively toothless. Half the job of escrow is to deal with a giant pile of legacy systems.
> As for property manager, with the surfeit of online tools for everything from listing, screening tenants to rent payment, their value is significantly diminished
"property manager as a service" seems like a fine concept, but there will still be many people who do not want to do that work themselves. By all means, be a "virtual" organization, but someone still needs to have a rolodex of repair services to call when someone needs their air conditioning fixed in the middle of the summer.
Visa provides protection from a lot of risk on both the buyer and seller's side.
As a seller I know that if a Visa payment clears I'll be getting that money, even if the customer doesn't have it. I don't need to arrange financing or risk taking a check that may bounce long after the customer has disappeared.
As a consumer, I get some measure of protection from fraud and have the option of doing a chargeback and letting Visa sort things out with the vendor if something is not as described.
Just to be clear: as a seller you are not indemnified by Visa if you accept a fraudulent payment. In that case, the money is taken out of the seller's account and returned to the buyer.
You really have no idea how the payment card industry works. Visa provides 0 protection to the buyer or the seller.
The card issuer/bank provides protection to the buyer.
NO ONE provides protection to the seller. The seller's are 100% expose and lose most disputes. With EMV, some of the risks will move but not much. All online transactions are keyed, so not subject to any protection.
Visa doesn't sort out anything, they provide a network and take a cut. Disputes happens between issuer, processor in the middle and merchant. If the processor fails to recover the money from the merchant then the processor is on the hook.
And if the person you ordered from fails to send you the item? Or sends you a defective item? Or if someone steals my info and spends my cash?
Credit cards act as an escrow service to protect against all of those things. Cash (and its online equivalent) has a place in the world, but so do credit cards.
I don't really want, and definitely don't need, that sort of thing. I'd much rather pay for online purchases using something that protects me in the event of fraud.
Hence the existence of credit cards. It would be nice to have these protections without the line of credit attached but you can just ignore it if you want.
Their value really is that they exist and are more or less a monopoly, so you have to pay the fees to use them (as a merchant) or turn away the overwhelming majority of customers.
I think they clearly have value, but the problem is that it's hard for the market to settle on the true value because of the games they play with credit card points. They've tricked consumers into thinking that credit cards incur no costs, but in fact give them cash back and points.
If points were banned, and consumers instead paid the credit card fee as a line item on their receipt next to taxes, you might find more downward pricing pressure or consumers willing to pay cash.
Well duh, of course people would prefer cash if their credit card started costing them money. Credit cards are basically free to the consumer. You could argue that the ever-present fees causes the prices of goods to go up to compensate but it's just really not the case. You can look at merchants that accept and don't accept credit cards and you won't see really any tangible difference between the prices of their services.
There are a decent number of places that have a minimum price for using a card, and I've even seen gas stations that charge extra per gallon if you pay with credit instead of cash. I definitely agree that in the overwhelming majority of cases there isn't a difference to the consumer, and even when there is it's fairly slight.
Prior to their existence what mechanism provided the same avenue for transaction? Especially as the world moved online I would argue they became more relevant for transactions. I don't disagree with the monopoly part but that doesn't discredit their value in my opinion.
Not only do they exist, but they provide some kind of infrastructure to transfer payments. How do you do this without a middleman? Even mailing a check relies on banks and a postal system.
If you're paying 3% you're getting ripped off. There is no reason you should be paying more than 1%. In the EU interchange is 0.3% for credit and the scheme fee is less than that.
Maybe if you're doing an unauthorised, interdomain transaction with an imprinter in a brothel then 3% is reasonable.
Authentication would only solve one type of fraud (using someone elses credit card). What about when you buy something online and the seller doesn't send you the item? Or sends you a broken item? What is a service breaks their contract with you?
There are lots of kinds of fraud that aren't identity based.
It really depends on a lot of things (do you have a chip terminal? If not, are you a gas merchant and based in the US, and the total transaction is under $50? Are you enrolled in 3D Secure? Are you on the Full Fraud Recourse list?...etc.)
How you answer those questions determine chargeback eligibility. Even if networks do issue a chargeback, you can provide a 2nd presentment with evidence supporting your claim that it wasn't your fault. Finally, if all else fails, you can go the Good Faith Credit route.
Which leads me to say that the burden of fraud really falls on the network, not the merchant, since they have to abide by definitive chargeback policies set forth, and be willing to accept 2nd presentments for the sake of maintaining merchant relationships.
Your conclusion still holds true- swipe fees should be less than 3%- probably closer to 1%... let's just say I work in the industry, and see how the proverbial sausage is made.
Only online transactions(CNP) where you ship the product to address other than card's billing address. If the merchant uses 3D secure for online transactions, issuer is fully liable for fraud. For card present transactions, issuer is fully liable for chip based transactions. Merchants only bear risk if its a stripe or a manually keyed in transaction.
High cost of for credit card transactions is because merchant pays for the 60 day interest free loan on the money that the bank is giving the consumer to make the purchase. Debit network transactions are a lot lower, 0.5% for durbin amendment cards(90% of cards out there).
I am in Australia where the rules are different, but does 3D secure protect you against the CC owner claiming the item is not as described or was not received?
visa fees? way less. total fees to the merchant per swipe is way under 3% for any sizable businesses. something like 1.2% + $0.10 was average when I worked for a payment processor.
> Institutions that add little to no value in transactions
I think the key qualifier you're missing from this broad assertion is "transactions which, by and large, go according to plan." Each of these institutions offers little value in cases where the parties involved are both fully informed and fully above-board, but each of these institutions offers critical protections in cases where one of the parties fails to uphold their end of an agreement properly.
Visa is not a payment processor, Visa is a payment scheme. Payment schemes offer a variety of value
- settle and clear globally in almost any currency, almost any country, if you accept Visa and somebody with a Visa walks in your store we'll be able to pay
- protection of the merchant against insolvency of the card holder (yeah the issuer comes up with the money but Visa makes him pay)
- protection of the card holder against fraud
- protection of the card holder against misconduct by the merchant (ie. but not limited to the merchant not shipping the goods). this is really easy to do for the card holder without having to the merchant, which may the on the other side of the world, to court.
- a rule book for international conflict resolution
- rules for software development and operation processes among participating companies, see Mt. Gox
- rules for terminal security
- a lot more
If however you mean that Visa is a worse version of MasterCard that doesn't have its shit together, then I agree.
Less middlemen is also why so many people are getting scammed out of $ in ICOs.
There was a thread on HN a while back where HNers proposed regulation for BTC trade.. comment by comment rebuilding the (legitimate) reasons for regulation.
I'm not saying the SEC is a force of good, just saying that good and bad can come with less regulation.
I'm really on the same page with you expect for 4. The property manager does give important value which is close to "managing human resources". He might get, disproportionally, higher pay than what he should but that might have to do with your target population.
(ie: if you are renting a cheap house, you'll need for of "managing human resources" than for an expensive one. Even though you are getting less for the deal).
The actual payment networks like visa and mastercard charge very small amounts in most cases, something around %0.15 + $0.02. Most of the credit card fee is going to the issuing banks.
To all of the commenters in here, selling stock is not the only way to raise money. Direct listing does not mean "they don't need to raise money." In today's environment it's much better for a lot of companies to be issuing debt instead.
For many companies yes. But for companies with relatively poor financial fundamentals, debt is not that cheap. Tesla's 8 year bonds are currently yielding close to 6% (and they got a great deal on this too). They're rated junk. Spotify would likely have to pay a higher coupon than Tesla. Debt for them is not that cheap.
That being said, if you can issue investment grade bonds, then debt is very cheap.
There is none. On the first day of trading there would be an opening auction as is done with every other stock listed on the NYSE. Prior to open, everyone interested in trading submits his orders. Then as many shares as can be traded are traded at the price at which the maximum number of shares can be traded. That is, the price is determined by supply and demand.
The IPO price is the price at which shares are sold by the company to the public and represents the new money invested in the company. Then on the morning on which trading opens there is an opening auction as described. Ideally this price is near the IPO price, meaning that neither the company nor the investors left money on the table.
Spotify is proposing to skip the IPO, and not raise further money. They must think that their stock is already widely held enough to support trading, and that they have no need of further money.
It will be interesting to see what happens if they go forward with this. While the mechanics are no different than any other day of trading, I suspect the type of trading will be very different. Currently all holders of Spotify stock are long-term investors, simply because there is no market. Until traders acquire enough of it, liquidity will be bad and the price will probably jump around a lot. In addition, many people will want to invest, so they will buy. Will current holders want to sell? I suspect they will want to watch trading instead of selling at the first possible moment.
I think we'll see a rapid rise in Spotify's price due to high demand and lack of supply. The current holders will undoubtedly be looking to reduce their stake. Will demand keep up as they begin selling, or will price rapidly fall as trading becomes, for lack of a better term, "normal."
> There is none. On the first day of trading there would be an opening auction as is done with every other stock listed on the NYSE. Prior to open, everyone interested in trading submits his orders. Then as many shares as can be traded are traded at the price at which the maximum number of shares can be traded. That is, the price is determined by supply and demand.
This is just positively incorrect for stocks that did not IPO via auction or regular model.
In the regular model a company sells stock to the underwriters and the underwriters make initial placement of the stocks with their clients. Some of those clients would be interested in selling the stock immediately especially if the stock pops. Since underwriters limit the release of the stock to below interest on the market either via pricing or by artificially restricting even the shares that have been allocated to them there are buyers on the other side.
Presence of buyers and sellers at the same time creates a condition needed for the price discovery. In addition to that, the underwriters as the part of the contract guarantee that their affiliate entities would provide market making either directly ( mostly for OTC ) or via ECNs for NYSE listed stocks. These market makers would cover their short positions created by the buy orders using the shared delivered to the underwriters. All of these services are covered by the fees that underwriters charge.
One of reasons the current plan is being "studied by the SEC" is that if the company is planning a direct listing without the Dutch auction is that there are no market makers that are able to guarantee delivery of shares in the beginning of trading.
So basically the IPO is a way to formalize the initial price of the stock. By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?
If this is the case, is it possible the market could drive the price way up or way down (more volatile?)
Additionally, is it possible that all private share holders could prior to first day of listing come to an agreement on a minimum price they would sell for? This would essentially be them setting their own price. Now whether people are willing to pay at that price is another story.
> So basically the IPO is a way to formalize the initial price of the stock.
no. it is the company selling their stock to the public for the first time, to raise cash. the company chooses a price it is willing to sell at.
further, "formalizing" the price of the stock isn't a thing. the price of the stock is whatever somebody will sell it to you for.
> By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?
once the stock is on the market, it sells for whatever someone will buy it. the IPO happens shortly before it hits the market.
> Additionally, is it possible that all private share holders could prior to first day of listing come to an agreement on a minimum price they would sell for?
sure, they could. but there are probably already hundreds or thousands of them.
> no. it is the company selling their stock to the public for the first time, to raise cash.
That's incorrect. The company is not raising cash with this IPO. The insiders are doing the IPO to sell, which should tell you what's actually going on. By direct listing, they avoid the traditional lock-up, so they can liquidate immediately.
The comment you're replying to is describing a regular IPO, and is not incorrect. The direct listing process is not a type of IPO; it's skipping the IPO.
Well the IPO price is the price at which the company sold new stock to the public. Then the price moves however the market causes the price to move. They're not going to sell new stock to the public, but the price will move however the market causes it to move.
The market works because there are always people willing to take both sides simultaneously. To some extent this is driven by people who have different opinions. This is also drive by people working on different time frames. Somebody who thinks it will rise in the next 10 years may buy from somebody who thinks it will fall in the next 10 minutes.
When there are not hoards of people willing to take both sides, price starts to move around erratically. Ultimately Spotify isn't very widely held. I doubt any of the current holders are interested in trading frequently. They want to make their trade and get out. So who is selling on the first few days? Market makers will work both sides of the market as they always do, but they won't hold a large short position against a rising market. Instead the spread will be large. That's why I suspect we'll see some wild price swings before the market settles down.
On the other hand, you could say this about any IPO. And it's true that the first few days are often rocky. It remains to be seen if Spotify's plan produces a more rocky start than is usual.
They certainly could (subject to market manipulation laws). Would it work? Probably not. There will be sellers willing to sell short naked (intending to buy back by the end of the day so they don't have to deliver non-existent stock). I'm sure there's many holders, since Spotify has been around for a while and presumably has some sort of stock compensation program. Will they all refrain from selling? No, because somebody wants to renovate his kitchen.
> So basically the IPO is a way to formalize the initial price of the stock. By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?
No, IPO is the placement of the shares from whoever has them before the IPO position ( underwriter or the company itself ) to the accounts of those who want to have those shares the moment before the new issue is listed on an exchange.
Buying at the open is not buying at the IPO.
Company X selling shared to underwriters at $7/share is not an IPO.
Underwriter pricing shares that it bought from the company for $7/share at $11/share and delivering those shares to the Suzy Investor who wanted to buy that company before the shares open is the IPO.
Suzy Investor selling shares at $11.05 which is the national best bid the second after the stock opened to John Q. who did not get the shares from the underwriter is NOT the IPO.
per earlier comment, yes, way more volatile because supply/demand will be less managed - as you say, IPO sets price, and this is done when bankers effectively pre-negotiate price and placement amounts with many institutional investors (mutual funds, public pensions, other large alternative asset managers etc.) - this is happening throughout informally (though very informally, since they can't offer the security until SEC registration is complete), but really gets down to details during the IPO roadshow, where the final deal is present and the bankers finalize the allocations to various institutional investors, which is what they use to set the opening day of trading price.
IPOs also require lockups of pre-IPO investors, and the ideal situation is always to have a large number of new well-respected investors take relatively large blocks that they are likely to hold for a long-ish period of time and pre-IPO investors locked up for a at least 6 months, which will introduce some protection against volatility and the stock price going below the IPO price. obviously price can still go haywire, but it's the best a company can hope for in the public market.
I assume it would be the opening auction. At the start of trading every day (and on every interday restart and close of day) there is an auction held. All interested participants enter market or limit on open orders from 5 to 15 minutes before the auction (depending on which auction). The exchange will periodically publish what are called imbalance numbers that show relative buy/sell pressure and what price the auction would go off at if it happened that instance. When the auction does go off, the price is chosen to maximize volume. This is how we get opening and closing prices of a stock. It isn't just the last price traded.
In this context, the those that have stock (including the company itself) would probably have their shares moved to a brokerage and then they can sell directly to the public who wish to buy. Basically the same that would happen with the first day of public trading on the secondary market after the initial offering.
The same thing that determines the price when the market open on the first day of trading following an IPO: the point where sellers and buyers meet. But if liquidity is scarce and trading volumes are low, price discovery will indeed be hard.
They're absolutely going to need to raise money, soon.
They've lost $822 million in the last two years, with their losses skyrocketing last year to $581 million. At least $400m to $500m of their prior VC from years ago (2008-2013) is guaranteed to be long gone at this point.
They're down to less than 12 months of capital unless they've suddenly figured out how to make money in the last few months with a blackhole business model that can never produce meaningful profit because they don't own most of the content and the licensing will perpetually squeeze them to death.
You have a right to a portion of the proceeds from a merger or acquisition.
Whether or not the company ever actually pays out its earnings as dividends, there's little way to access those earnings without divvying them up amongst the company's shareholders.
A merger or acquisition would only happen if the buyer expected to make money from the transaction. This looks like an Even Bigger Fool Theory. It is a little different because the CEO could take dividends whereas I, as a stockowner, cannot.
Potentially, a company's performance being good would motivate someone else to buy the company. But what I'm getting out of this is that you don't buy (dividendless) stocks because a company's doing well but ONLY if A) you think they will be sold or Bigger Fool Theory
If a company has a billion dollars more cash than liabilities, it's worth at least a billion dollars in a M&A deal today. You don't need a bigger fool, just someone who's willing to wind down a business to net assets. See what happened to Yahoo as a creative example of this - the operating business was a net liability, but it owned a good chunk of valuable Alibaba stock that made the stock positive-value, so it got split up, sold off, and wound down.
The dividends don't matter, IMO. It's net assets and net profits that do.
Re-investing the profit is a choice by management that turns company assets into more company assets. It doesn't turn company assets into outbound cashflow to owners and investors.
Sure. Might be easier if I use specific companies and people.
If Snapchat ends up being wildly profitable, Evan Spiegel can't simply spend those profits, because they belong to Snapchat. If he wants to spend those profits, his choices are to either collect a dividend from the stock he owns, have Snapchat buy back his shares, or sell the right to participate in those future events on the open market.
Or with a super simplified analogy: Snapchat is a box with some cash and the operating business inside it. When Snapchat makes money, it means there's more cash in the box. If someone wants to buy the box, they pay shareholders for it, and if there's more cash in the box the buyer is going to pay more for the box. Paying a dividend is taking cash out of the box and handing it to shareholders. The value of the cash plus the rest of the box is the same whether the box gives money to the owners directly (through a dividend) or indirectly (by getting bought for more money). So really, dividends don't matter. If the company decides not to pay a dividend, it turns $X of stock + $Y of dividend into $X + $Y of stock.
For companies experiencing a high rate of growth and good long term ROI, many investors would prefer the company reinvest the net revenue instead of paying dividends.
Some investors prefer capital gains due to tax treatment (long term gains vs income tax). Many companies oblige this with stock buybacks.
What you describe is the bigger fool theory can certainly have a relationship to dividends, whereby the assumption is that in some future state after growth slows or plateaus, then that's when dividends will start to be returned.
Shareholders decide what corps do. *But you're right that some tech companies are doing this new model where founders reserve control of boards and in that model you're right, it's a fundamental shift.
In theory, you're buying future profits. The profits may never be distributed, but that claim is still worth something. A hundred dollar bill in a block of ice is still worth $100 or so, and can be bought and sold as appropriate.
Sure, but how often does it actually happen? It looks to me (admittedly as a clueless outsider) that the probability of any company issuing dividends is near 0.
It is often better for everyone involved (thanks to slimy but legal tax structures) to NOT provide dividends, even if there is no other use for the money; In that case, the would-be-dividend is incorporated into the price of the share (just as it is on the day before dividend payment from a company that DOES pay dividend), and you can realize it by selling the share.
> the would-be-dividend is incorporated into the price of the share
This is right where we started. I'm not actually going to get the dividend, and neither will anyone else, so why would I or anyone I might sell it to pay more for that stock than I would otherwise?
that's what my issue with stock investment is. They aren't financial tools, in the way I'd like to think of a financial tool like a loan or interest-bearing account.
They're gambling on what other people en masse will value a stock - some of whom are also trying to predict my actions.
If I predict price goes down, I should short.
If I predict prices goes up, I should buy.
Even the parent comment to my question says "you get money in case of a merger or acquisition" which to me is a bigger analogue of the Bigger Fool theory.
I only make money if another company buys the company I have stock in which they would buy only if they expect to make money. In their case, possibly whoever buys the company can take dividends (as the new CEO) but it still looks like a bizarre thing to do (buy stock).
IPOs accomplish two concrete, positive things: 1. raise funds and 2. provide liquidity to investors. they also make a company seem more legit (at least in some cases, and in some circles). on the negative side, IPOs expose the company's financials and business plans, are expensive up front and on an ongoing basis to comply with SEC regulations (quarterly and annual reports, proxy statements, etc.), and also open the company up to major scrutiny and attack on the public market, with investors looking at the business performance quarter to quarter and activist investors looking for weak companies to push around (probably the nicest characterization, but you know what i mean).
On the positive side, direct listing basically provides only for liquidity to investors (though of course they can try and raise funds in the public market down the line if they want). In spotify's specific case, they are also probably being pushed by their later stage investors, who's deal specifically contemplates achieving liquidity in the relative short term (the investors did a convertible loan where investor terms improve the longer it takes spotify to go public). In any case, spotify has good brand awareness, so really the direct listing is all about liquidity. On the negative side, since Spotify is a european company, even as a private company it already exposes its annual financials publicly (though only on a delayed annual basis and without as much required discussion of the business), but a direct listing would still open the company up to major scrutiny and attack from activist investors.
in most cases, IPOs are considered motivated as much by fundraising as by liquidity (at least that's what the foudners / investors want you to think), and in fact big investors or founders selling big positions is generally taken as a negative signal (if they "really believed" in the long-term potential of the business, wouldn't they hold it? or so the theory goes). hence the lock-ups that most founders and pre-IPO investors agree to, which guarantee that at least for a set period of time, pre-IPO investors don't dump the stock en masse and introduce massive volatility into the market.
In spotify's case, I think the SEC and the markets will want to look closely at the lock-up periods or other restrictions on sale for various investors, founders and the employees (if any), and try to determine exactly why and on what terms and in what amounts the various pre-IPO shareholders want to achieve liquidity. off the top of my head, there are three main views:
1. viewed generously, you can say: "well, they've been doing this for a long time, built a great business and still believe in the long-term future of the company, but they all want to sell 5% because they are only human, will die someday at some point and can't wait forever to cash out of their business".
2. viewed less generously, you can say: "well, the management and main investors who know the business best are not certain about the long-term potential for the business and so want to cut and run before the downward trend realizes itself, and so we should read their push for liquidity as a negative signal for the business".
3. another very spotify specific case could be: "management believes long term and could give a shit about going public, but TPG and other late investors are demanding this and they have different objectives, and if we can satisfy those without diluting the business, I guess we'll just do that".
of course, it's probably a combo of those and other factors, but as an investor i'd be mostly trying to read and see if this is just earlier investors trying to dump shares because of lack of long-term faith - if so, be weary! on the compliance side, the SEC's main job is just to ensure proper disclosures are made (even if the business is less than ideal), but i'd probably want to see what I can do to minimize the potential impact of the less generous interpretation of motivations and any scenario where pre-IPO investors make a bunch of money by dumping their shares on the less-informed-about-the-business average investor.
It's very possible that employees just want the opportunity to liquidate what has been the bulk of their compensation for the past x years.
At some point, this becomes a recruitment issue: what's the point in working for a company that pays you in stock that you can never sell and that doesn't pay dividends?
> Wouldn't the price tank if the majority of insiders want to cash out?
that depends on the demand. if the insiders have more shares they really want to sell than there are matching buyers, sure. if the market is full of buyers will to pay huge sums of money, then no.
There is one downside to bypassing the IPO. If the larger banks miss out on their fees, these large institutional buyers can hold a grudge against you. This can impact your stock price over a medium term.
I think they know exactly what they're doing. You can't walk away without losing your earnest money, so you've already given up your best move before negotiation even started.
It doesn't help that trying to buy a house in many markets is restricted to those who can pay entirely in cash within 2 days of listing.
Earnest money is used when you've already made an offer. How do you make an offer while not including the cost of the fees in the sale? That sounds like poor negotiation.
Oh please....have you ever bought a house? The loan company and title company drag their feet to provide the final numbers between 24-72 hours before closing. By this point you've filled out miles of paperwork and spent more than a day (cumulatively) on the phone. Some of those papers you signed probably listed out these fees in tiny print somewhere, so you've already agreed to pay them. If you walk away you're losing due diligence and earnest money down, which is guaranteed to be more than the hundreds you're trying to "save" in fees. You've probably also made plans to move out of your current place and on with your life after the realty and mortgage industries sucked your soul out.
Earnest money is used when you've already made an offer. How do you make an offer while not including the cost of the fees in the sale? That sounds like poor negotiation.
Fees levied by the lending company and title company are in no way tied to the offer on the house itself. These fees are not included in an offer, which is an agreement between the buyer and seller.
The offer is an agreement on the price of the house, due diligence and earnest money from the buyer, contingencies (buyer needs to sell their own house) and any concessions from the seller (repairs, money at closing, etc).
Indeed. Except you have every right to know all the fees at that time. You can include those in your offer to the seller. Or even say the seller assumes all the fees. This is part of the negotiation because you're the one making the offer.
1> IPO underwriter 2> Title/Escrow company in a home sale 3> Payment processors like Visa 4> Property manager for a rental home 5> Realtors
These middlemen need to be bypassed to keep more value in these high value transactions and reduce costs!
I'm glad Spotify is doing this, hopefully other big names will follow