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Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts.
Defying pessimists, party-poopers and sourpusses, SoftBank priced the IPO of chip designer Arm at top of its $47-51 per share marketing range, achieving a $52bn valuation. Huzzah!
It’s perilous to guess how the stock will perform in the after-market, but it’s an achievement for Arm to have generated sufficient allocable investor demand to price at the top of the range. We will soon see if SoftBank pushed pricing too far or just drove a hard bargain with Wall Street.
Some see the flotation as a litmus test to determine if the IPO market — catatonic for the last two years — is now open for more deals. The prevailing consensus is that a successful listing would mark a “turning point” and set “the stage for the IPO market to reopen.” According to CNBC, “[s]uccessful IPOs from Arm and others will boost confidence for CEOs waiting on the sidelines”.
I have a slightly different take. The IPO market may have been quiet for a while, but it has not been closed. Investors have had the cash; except for short periods of volatility, there was no buyer’s strike, no mass investor retreat, nor even “extreme investor caution”.
Rather, it’s that expectations from companies and their backers have been out of whack. Many raised private capital at extravagant valuations during the 2020-21 pandemic period when the blue crystal-meth of fiscal and monetary stimulus turned investors into growth-asset addicts. The struggle to adapt to a new reality has clogged up the IPO pipeline.
Partly the blockage is psychological, a matter of pride and ego. Owners find it difficult to accept that their company isn’t as valuable as it used to be. Instead, they blame investors for their lack of vision and risk appetite, like the washed-up silent-film actress Norma Desmond who thundered in the 1950 film Sunset Boulevard: “I am big — it’s the pictures that got small.”
Partly it’s structural. It’s hard to raise public financing at a lower valuation than the last round of private financing. A so-called “down-round” may trigger anti-dilution provisions and compel investors to write down their investments. It’s also publicly embarrassing. That’s why a lot of owners and companies are loath to launch an IPO and prefer to bide their time and hope for a market recovery.
But at some point, time (or cash) runs out and companies and their owners face reality, take the (short-term?) L and break the logjam. It happened in 2015 when Box, Square and other companies went public at valuations below their last private funding forays.
The same may be happening today. SoftBank is taking Arm public at a premium to the $32bn price it paid in 2016, but at a substantial markdown from the $64bn valuation implied by its purchase last month of the Vision Fund’s 25 per cent stake in Arm. While SoftBank manages Vision Fund, its principal investors are Saudi and Abu Dhabi sovereign wealth funds. The share sale in Arm’s IPO also crystallises a so-so internal rate of return over seven years, paling in comparison with the astronomical gains SoftBank could have pocketed if it hadn’t sold its $3bn stake in Nvidia in 2019.
Meanwhile, Instacart is expected to debut on Nasdaq at less than a quarter of the valuation of its 2021 private funding round. Klarna is reported to be leaning towards an IPO at a significant discount to its $46bn valuation from Vision Fund-led private round in June 2021. Rumours abound of other companies thinking about biting the proverbial bullet and going public at a price below the last private fundraising
SoftBank chair Masayoshi Son is frequently portrayed as an eccentric and irrational investor. He has certainly had his share of humongous wins and losses. But on Arm’s flotation he appears to have been a stone-cold, rational owner tethered to market realities.
He has chosen the right listing exchange, secured substantial balance sheet commitments from the lead underwriters and eventually accepted an offer price lower than what he might have liked.
If Son can lift the taboo on down-rounds and make valuation compromises palatable to other companies and venture capital firms, he may be the hero that the IPO market needs.
