Peloton, Endeavor duds give IPO bankers another black eye
Wall Street saw 2019 as a harvest year, finally bringing the long-awaited public debuts of many of the hottest startups — and the healthy fees and deal prestige that came with them.
It hasn’t gone as planned. Fitness startup Peloton Interactive Inc. on Thursday became the latest major initial public offering to fall on its face, dropping 11 per cent on its first day of trading. Hours later, Endeavor Group Holdings Inc. pulled its U.S. IPO after downsizing the listing.
That trend — most notable in the declines of ride-sharing giants Uber and Lyft, which have tumbled about 30 per cent and 42 per cent, respectively — has accelerated in recent weeks. SmileDirectClub posted the worst opening trade for a big IPO in more than a decade and WeWork was forced to delay its listing because of tepid demand.
The market flops underscore a common disconnect between valuations in public and private markets — a reality check for banks that have long touted lofty appraisals to company founders in the hopes of being hired for their IPOs.
Their incentive is clear: Public offerings of unicorns offer some of the fattest fees in banking, along with a chance to reward top clients and drum up trading activity. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among banks that are expected to split about US$60 million in fees from helping Peloton raise US$1.16 billion.
But the high-profile misfires threaten to upset banks’ investor clients and stifle repeat business. They’ve also convinced some venture capital firms to plan more deals as direct listings, which don’t raise fresh capital and carry lower fees for the banks.
“Underwriters do misprice stocks,” said Howard Mason, a bank analyst at Renaissance Macro Research. “The risk is when you get valuations bid up to a point that is unworkable for the public markets.”
The price slumps may say less about the bankers’ skill than investors’ appetite for startups that have prioritized growth over profitability. Whatever the culprit, top IPO banks including Goldman Sachs, Morgan Stanley and JPMorgan have all stumbled on big-name deals.
Uber Technologies Inc., Lyft Inc. and SmileDirectClub Inc. are all down more than 29 per cent from their offer price. WeWork’s parent, We Co., was aiming for the second-biggest listing of the year at US$3.5 billion. Instead, the company will probably put off an IPO until at least next year, people familiar with the matter have said.
This year’s IPOs have been lagging behind the market, climbing 6.5 per cent from their offering prices on average, while the S&P 500 has gained about 19 per cent.