"The share price on the date of the offering is really not important in any way and has no significance from our point of view. It was important for us to get out onto the road, without any short cuts," explains Outbrain (Nasdaq: OB) SVP strategy and corporate development Gilad de Vries, regarding the circumstances that led to the lower than expected IPO price for the Israeli content recommendation company. These included, he said, general concerns about the stock market, specific concerns about the ad-tech market, and the fall in share price of comparable groups.
So how is the share price set ahead of an IPO, and how can you know if you are coming to the market with the right and appropriate share price? According to Oppenheimer Israel investment bank co-CEO Harel Gillon, "A company is in contact with bankers three to four years before its IPO, sometimes even before that. They are talking all the time and conducting some sort of relations and checking out when is the right time - with either the owners or a dominant investor like a venture capital fund. Sometimes the investor is also the lead investment bank. They talk about valuation and of course they are looking at the data about the company and the market."
He adds, "When companies reach their IPO, they try for it not to be at a lower valuation that their last financing round on the private market. Many time we see large financing rounds before the IPO, in which the valuation is at a discount in comparison with what is planned for the offering - say the company wants to raise money at a valuation of $500 million, and brings in a large investor at $450 million."
Gillon continues, "Recently the valuation in tech offerings has been a little cut off from the profit multiples and they are talking mainly about sales multiples, because of course all of them expect that the profits will come in due course - we are mainly talking about SaaS (software as a service) companies in which the lifecycle model of the company is to invest a lot to increase revenue by 'purchasing' customers, through all sorts of aggressive marketing means until the equation tips and the company succeeds in making significant earnings from revenue. But meanwhile, at the IPO, we are looking at the revenue growth, the market, peer groups, and what rival companies are doing."
There is not necessarily any connection between a compromise on IPO price and the share's subsequent performance
11 Israeli companies have held IPOs on Wall Street (including Riskified today) since the start of 2021, all of them worth more than $1 billion and most of them with positive returns since the offering. Ahead of the IPO, every company publishes, as required, what is the price range for the share that it is targeting. Of the 11 Israel companies that have held IPOs so far this year, five companies have completed the offering at a price above the range - e-commerce fraud protection platform company Riskified (NYSE: RSKF), gaming company Playtika (Nasdaq: PLTK), cybersecurity company SentinelOne (NYSE: S), work operating system company monday.com (Nasdaq: MNDY), and web analytics company Similarweb (NYSE: SMWB).
Four other companies held the IPO within the targeted range - e-commerce company Global-e (Nasdaq: GLBE), digital adoption platform WalkMe (Nasdaq: WKME), ad-tech company Tremor International (Nasdaq: TRMR.L), and video technology company Kaltura (Nasdaq: KLTR) - although Kaltura had been forced to postpone its first attempt at an IPO and cut its price due to market difficulties.
So far this year only two of the companies that held their IPO on Wall Street this year were compelled to compromise and lower their share price for the offering - Zim Integrated Shipping Services Ltd. (NYSE: ZIM) and Outbrain. Since then Zim's share price has risen 140%, proving that there is no tight connection between compromising on price and the share's subsequent performance.
Gillon says that when a prospectus is filed, and sometimes even before that, the company meets with investors and discusses valuation. "Sometimes they talk directly with investors and sometimes the feedback from investors comes via the bankers. Sometimes a pre-IPO deal comes out of this."
He continues, "They say that you should 'raise money when you can, not when you need it' because when you have to raise you sometimes have to compromise. If you raise money when you can then the cash coffers are full, allowing the company to develop without cash flow pressures. For tech companies it is very easy to raise money 'when you can' - through convertible bonds or stocks - while for biotech companies, which are today a little less fashionable - there is less dependency on what the stock market is doing but they sometimes reach a point when they need money. And then the capital raising is more aggressive, with a higher dilution and deeper discount, or a warranties offering."
Gillon cites two terms regarding the subject. There is the term testing the water (TTW), which is sometimes done before publishing the prospectus by coming and talking with investors, not as part of the IPOP agenda but by presenting the company. Just as a parent tests the temperature of the water with their elbow to check that it is good for the baby, so the company checks if the market is good. The other term is a non-deal roadshow, in which there is no deal on the agenda but the pulse of the market is felt. This frequently happens even after the company has held its offering."
Ultimately during the IPO, and after a roadshow, the companies begin to compile the orders from investors. Gillon says, "Here all the stars need to be aligned. When the orders arrive and in a significant way, there is no need to be sensitive to price - that is to say if the company plans a range of $10-$12, there is no need to say 'we are ready to buy but only at $10,' but 'we want to invest $10,' or 'we want to buy 100,000 shares,' on the matter."
"The less sensitive that the book is to price, the stronger it is. The orders are collected and if they accrue then the offering becomes oversubscribed. At this stage there are investors who tend to increase the investment because perhaps this will promote them, or the company can increase the size of the offering, or raise the price of the share in the IPO."
This happened recently with SentinelOne, which ahead of the offering hiked the share price range from $26-$29 to $31-$32 and finally issued the shares at a price of $35.
"When the share jumps, it's always a good headline. It's important that everyone profits."
In other instances there is no revision upwards of the price range but the price of the offering is higher than was being asked. So for example with monday.com, the range was $125-$140 but the price was set at $155. Gillon says, "Everything essentially develops during the roadshow. If the lead underwriter sees that quality orders mounting and there is a green light from investors who are ready to pay more, then the price of the offering will rise in consultation between the company and the investors in it."
There are cases in which the share price jumps by 20% or 30% or much more on the first day of trading. Does that mean that the investors prior to the IPO have been suckers who could have aimed much higher?
"I wouldn't call them suckers because most of the investors are venture capital funds and the offering has been held at 10 times higher than their investment. It's very important in the industry to give everybody a chance to profit. The company wants to raise $200 million - it raises $200 million; the share rises 20%, 30% or 40% on the first day of trading and everybody profits. The company raised the money, the underwriters it is reasonable to assume will exercise their options to buy more shares, the funds haven't sold shares because they are still blocked, and the employees also hold their shares, and in the future they can hold a secondary offering that will include an offer to sell."
"This is of course a preferable scenario than where a lot of money comes into the company and the share falls or stays around the IPO price, because then the dynamics around the company are a lot less positive. When the share price jumps, it's always a good headline."
On the other hand, there are IPOs that are completed under the price range being asked. Have there been more of these recently?
"I don't have statistics but perhaps a stuttering market contributes somewhat to this. There are still shares that rise sharply and each and every stock is a different story. Even if the company compromises on the IPO and then the share price rises nicely, the end result is positive. There is money in the coffers, the share is being traded, and now it will be judged according to its performance on the capital market."
Published by Globes, Israel business news - en.globes.co.il - on July 29, 2021
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