Overvalued Tech Companies: Failed IPOs

Part
01
of five
Part
01

Failed IPOs: General Insights

Five insights namely inflated valuation (greed), corporate governance, undervaluation of shares, losses, and traditional IPOs, are provided and discussed below. The insights also provide some company examples, economic impacts, and a notable moment of history. The findings also concluded that there had been an increase in the number of failed IPOs over the past five years.

Insights

Inflated Valuation (Greed)

  • One of the insights into why IPOs of tech companies fail is because of how they overvalue their shares when they blow out. In this era of getting information at one's fingertips, investors can be very conversant with the actual worth and achievements of a company. As a result, investors tend to be very skeptical when companies set down prices for their shares.
  • The riding-share company, Uber, is a good example. For a company that had never been under the examination of public markets, it ought to tread carefully on its expectations.
  • The ride-share giant placed a very greedy value on the company with over $100 billion in valuation for its IPO offering. Following the first day of trading, its valuation fell short to $76 billion. Even after the stock recovered, the price is still below the IPO offer of $45.
  • Now, the economic impact is that confidence in the company's stocks is being eroded as it recently suffered a $5.2 billion loss.
  • Another economy impact arising out of this would be a plethora of litigation cases — a class action most likely. For instance, Lyft — a ride-sharing company was sued by angry investors for being misled by an inflated IPO share price.

Corporate Governance

  • Another insight is the issue of corporate governance of many tech start-ups. Due to inadequate supervision, many founders of these companies have squandered venture capital cash injections into the business. As a way out of the financial mess created, they start looking for a new investment package in the form of an IPO.
  • A good example is WeWork. This company had to postpone its IPO after the inflated valuation of its IPO offer backfired. This followed the realization that its chief executive had become a worry for investors.
  • It was discovered that the company's debt is now deemed 'distressed' and its liabilities to property owners is worth $47 billion. All future development of the company has been put on hold, and a minimum of one-third of its employees would be out of jobs.
  • Presently, the company's operating capital cannot see it through the next 12-month calendar and without the IPO, WeWork will face serious difficulty to raise money any other way. If this happens, it will hurt the economy as the company's workforce of 15,000 would be left unemployed.
  • Another economy impact is the growing fears that the consequence of hindered demand may result in a property recession.

Undervaluation of Shares

  • It is not only an inflated valuation of a company that can result in a failed IPO for tech companies; undervaluation can be disastrous as well.
  • For a company to succeed at its IPO, the valuation of the company must be put in balance and accurately nailed on the head by adequately relating with brand's market size at the moment of offering IPO.
  • Today, Twitter's stock is valued at $39.07, but a notable moment in history was when the company went public (2013). Its IPO was undervalued at $26 per share, rather than its valuation price of $45 a share.
  • As a result, the company lost more than a billion dollars. It was a tragedy because the company had never earned that much revenue during that time. More so, it is trading today at a price less its expected valuation at the initial public offer.

Losses

  • While investors may be patronizing the IPOs of non-profitable companies, the public market does not put itself on a similar page. The former usually hold the belief that the rave of technology can bankroll the future growth of tech companies and can, therefore, tolerate current perpetual losses.
  • In 2018, the percentage of tech companies in the US that didn't make a profit and went public was a staggering 83%. Unfortunately, profit matters.
  • Again, Uber is a practical example of a company that wasn't making a profit but decided to go public and the same can be said of WeWork. Uber doesn't have a business model that can yield successful revenue.
  • On the other hand, Zoom Video became more valuable "than any other tech company to go public this year" after it began trading publicly. The simple reason behind this is because it was profitable before offering its IPO.

Traditional IPO

Increase of Failed IPOs in the Last Five Years

  • There has been an upshot in the numbers of IPOs issued in the US from 2016 to 2018, although there was a decline between 2015 to 2016.
  • In 2018 alone, the percentage of tech companies in the US that went public without being profitable stood at 83%. In so far as the majority of tech companies are going this route, it has become a trend.
  • Industry reports state that the "credibility of investment-bank valuations in loss-making companies" has been damaged. Thus, there is no point of an early exit for investors who intend to capitalize on it. This implies that there was still credibility in this process some few years back.
  • Having established above that profit matters before going public, an increase of failed IPOs in the last five years is more likely.
  • More so, there are many companies valued with over $1 billion IPO that is recently underperforming in the public market as a result of share price decline in their IPOs. Some of these tech companies include ZTO Express, Genuity, Shanda Games, ADT, and Uber.
  • Analysts have also reported many IPO failures in recent times. According to a report in the Financial Times, the reason the market is growing is attributed to IPO failures. Therefore, it is safe to conclude that there has been an increase in the number of failed IPOs over the past five years.

Research Strategy

We started our findings by examining market reports and analysts' remarks towards finding underlying insights into overvalued tech companies/failed IPOs. After concise research, we were able to identify five comprehensive insights into overvalued tech companies/failed IPOs. For each insight, we described and explained using hard data, analysis, and examples, as appropriate.

Through the careful analysis of the market, we were also able to determine that there has been an increase in the number of failed IPOs in the last five years. The report in the Financial Times backs this conclusion.

We also provided company examples like Uber, WeWork, and Lyft, a notable moment in history like Twitter's IPO, and some economic impacts arising out of failed IPOs.















Part
02
of five
Part
02

Failed IPOs: Future Projections

Provided in the findings are three insights into the future projections of overvalued tech companies/failed IPOs. They include how Lyft is guarding against a failed IPO through Internal control measures by engaging Michelle Debella from Uber, who is an auditor to oversee the company's finances as a way of improving investors' outlook, how WeWork is guarding against a failed IPO through rebranding, and how Uber has changed their chief executive to guard against a failed IPO.

Insights

A Lack of Internal Control Culture

  • According to Maggie Wilderotter, chairwoman of Lyft's audit committee and member of the board of directors, she stated that the new internal vice president Michelle will bring on board her collaborative and pragmatic approach to the financial leadership of Lyft. This, in her words is exactly what the company needs to position itself for future success and growth in a responsible manner.
  • Future projections would be simply to have these internal controls in place to avoid nefarious activities within the companies
  • Engaging Michelle Debella will signal to investors that the company is willing to make changes that will better position the company.

Rebranding to Guard against failed IPO

  • WeWorks rebranding to We Company is the companies' strategic move to expand beyond workspaces into residential communities. This move will create segmented drives with each having its name.
  • Under the new We Company umbrella, the segmented companies will be called WeLive and WeGrow and would run as stand-alone units. This is intended to help change the face of their company in the face of investors.
  • This move is relevant to the IPO because it improves the feeling investors would have about the company during their next offering.

Due Diligence in Over-Priced Valuations

  • Some have suggested that issues of the 2019 IPOs were a sheer lack of careful examination. An examination of private companies with enormous losses and lofty aspirations. According to the report, Peloton sells happiness and a vague plan to turn profitable.
  • Uber has struggled to recover from a raft of incidents that brought to the fore concerns of its workplace culture during an IPO.
  • Uber's longtime chief executive was pushed out by investors, while the company hired a former attorney general to conduct a study of its workplace culture and ethics. This culminated in a 13-page report, providing new employee guidelines, which suggested reducing the availability of alcohol in the workplace.
  • The removal of the executive will give potential investors a second thought on any new IPO.

Research Strategy

We approached relevant sources to reveal some insights into the future projections of overvalued tech companies/failed IPOs. The information we gather from our sources was able to establish three insights that could guard against future botched IPOs. Sources like CNBC and Market Insider had some hard data which we used to corroborate our findings.
Part
03
of five
Part
03

Failed IPOs: Case Study I

Uber, Lyft, and ADT are examples of companies with a valuation of over $1 billion that have had failed IPOs.

Uber

Description

  • In 2019, Uber Technologies, Inc. launched its IPO at the price of $45.
  • When the opening bell rang, Uber shares opened at $42 and then it dropped to $41.06. At the end of the trading day, Uber closed at $41.57.

Factors that resulted in the failed/withdrawn IPO

  • The company priced its initial public offering much lower than many inside and outside the company had been expecting, which resulted in a stock plunge of 8% in its first day of trading.
  • Uber was in the red zone and waited too long in its valuation curve.

Impact on the investors

  • The failed IPO of Uber wiped out $655 million of investor wealth on its opening day.

Impact on the company

Lyft

Description

Factors that resulted in the failed/withdrawn IPO

  • Lyft had been "valued privately at levels that have not followed through in the public market."
  • Investors were wary of the business prospects in ride-hailing and the proliferation of such structure precipitated a market sell-off. The Lyft IPO put early investors on a path to liquidity and selling at any price was better than not being able to sell at all.

Impact on the investors

Impact on the company

ADT

Description

  • ADT IPO was launched in 2018 and priced at $14, well below its targeted range of $17 to $19, to raise about $1.6 billion.
  • The shares promptly fell by 10.5% on its opening day.
  • ADT CEO Tim Whall was replaced by Jim DeVries in November 2018 within less than a year after the security company completed its initial public offering in January 2018.

Factors that resulted in the failed/withdrawn IPO

  • ADT had a lot of debt and a unique non-GAAP metric at the time of launch of IPO, which limited its ability to incur further indebtedness, make acquisitions, or pay dividends.
  • The company priced the IPO at $14, well below its targeted range of $17 to $19.
  • ADT had a huge amount of liability at the time of IPO launch.

Impact on the investors

  • ADT's shares dropped 12% to close at $12.39 in their first day of trading, causing losses to investors.

Impact on the company

  • The company failed to meet its target, as it had planned to sell 111.11 million shares to pay down debt, but ended up selling 105 million shares.
Part
04
of five
Part
04

Failed IPOs: Case Study II

An Initial Public Offer (IPO) is an effective way of raising capital. However, companies such as Peloton, Postmates, and Endeavour have struggled in their IPO, thus affecting both the investors and the company. After a failed IPO, Univision and Blue Apron changed their leadership and/or conducted massive layoffs.

Peloton

  • Peloton provides cloud-based live streaming of instructional cycling content on a multi-touch console fitted with social elements. Peloton also provides live and online classes, with its focus being strength and cardio workouts.
  • On September 26, 2019, the company listed on the National Association of Securities Dealers Automated Quotations System (NASDAQ), but the IPO failed. The stock price closed at $25.76, which marked an 11.2% decline.
  • Peloton’s IPO failed because it was highly-priced at $29 considering that the stock started trading at $27 on public markets. The company managed to raise $1.3 billion through the IPO, which ranked among the lowest compared against other IPOs this year.
  • Another factor that contributed to the failure is the company’s precarious cash flows that made investors uncomfortable. For instance, despite having a 110% revenue increase in the fiscal year ending June 2019, it suffered a loss of $195.6 million, equal to a 400% increase from the $47.8 million loss suffered in the previous year.
  • On her part, the company’s Chief Financial Officer, Jill Woolworth, attributed the failure to the deteriorating macro market.
  • The failed IPO wiped out $900 million in investor wealth. It has also exposed the company’s critical weaknesses among them unprofitable operations.
  • The failure has scared away prospective investors who fear losing their money. They now believe that the company is struggling financially despite the good figures being posted.

Postmates

  • Postmates is an urban logistics and delivery platform that allows users to ship any item within the city for same-day delivery. It connects couriers with customers for delivery of goods. It seeks to empower communities to shop locally with little waiting time.
  • It was founded by Sam Street, Sean, Plaice, and Bastian Lehmann in 2011. Its headquarters are in San Francisco.
  • Postmates is valued at over $2 billion. In 2018, it had a revenue of $400 million. Monthly, the company makes 5 million deliveries.
  • Since announcing its planned IPO early this year, Postmates has delayed the debut citing the prevailing market conditions. According to the company’s CEO, Bastian Lehmann, Postmates is closely observing the macro economy before making a final decision on the IPO. He states that, “the reality is that we will IPO when we believe we find the right time for the business and the right time in the markets.”
  • Failure of other startups such as Lyft, Peloton, and WeWork on their IPO has also caused the company to review its timing. All signs indicate that the IPO is unlikely to take place this year.
  • Postmates’ withdrawal of the IPO could erode investors’ confidence in the company, especially because it comes at a time when other companies' IPOs have failed. Thus, investors will approach any future IPO with much caution, which may affect its market performance.
  • Conversely, the withdrawal puts the company’s preparedness with regard to the IPO up for scrutiny. Serious questions will be asked regarding its decision-making organ considering that it filed its paperwork for an IPO in February 2019. For an organized and confident company, the delay is an abnormally long time to stay in limbo.

Endeavor Group Holdings

  • Endeavor is a next-generation media firm that operates a global events business and a talent agency. It also runs emerging sports league and a streaming platform. The entertainment, sports, and content powerhouse was formed in 2009 following the merger of William Morris Agency and Endeavor Talent Agency.
  • It is headquartered in Los-Angeles and has valuation of $4 billion . In 2018, it had a revenue of $3.61 billion and a net income of $232 million.
  • Despite announcing the IPO earlier this year, Endeavor withdrew it on September 19, 2019, hours before trading started in the New York Stock Exchange. One of the factors that led to the withdrawal was weak stock market demand. Another factor is the recent failure by companies such as WeWork, Peloton, and Uber in their IPO.
  • According to the company’s management, the general stock market is "schizophrenic" amid China-US trade wars. The fact that investors have started seeing companies as overpriced also played a part in the withdrawal.
  • Endeavor’s withdraw eroded investors’ confidence in the company. Although investors will be compensated for the unliquidated stock units, they will shy away from another IPO by the company. Most of them, including agents will most likely walk away.
  • To the company, the withdrawal is a major setback that culminated in the loss of several hundred million dollars in fresh capital. It also exposed the company as vulnerable, just like other companies that have failed in their IPOs. Endeavor’s CEO, Ari Emanuel’s image has also been tainted by the withdrawal, “Endeavor CEO Ari Emanuel found himself bloodied in the unfamiliar arena of Wall Street.”

Companies that Replaced their CEOs after attempted IPO, Laid off, or Sold Parts of the Company

#Univision

  • After a scuttled IPO in 2018, Univision laid off more than 150 employees. The laying off was aimed at eliminating some positions in its business units.
  • The company’s CEO, Randy Falco, also announced his retirement after the withdrawn IPO.

#Blue Apron

  • Blue Apron also laid off 4% of its total workforce in 2018 after going public the previous year.
  • Since the IPO, the company was yet it to make a profit, prompting it to look for ways of cutting costs.

Part
05
of five
Part
05

Failed IPOs: Case Study III

WeWork withdrew its initial public offering, a week after they ousted the CEO to address governance issues but caused their valuation to decline from $47 billion to $10 billion by their investor SoftBank. Other companies that experienced a lack of sufficient demand during their IPO in the United States include SmileDirectClub and Wanda Sports Group. Complete details for each case study are presented below.

Case Study #1: WeWork

Background Information

  • The We Company (the parent company of WeWork) was founded in 2010 as a platform for creators to transform buildings into dynamic environments for creativity, focus, and collaboration. The company designed the buildings' environments into beautiful, collaborative workspaces and provided infrastructure, services, events, and technologies so their members could focus on doing what they love.
  • According to Reuters, WeWork’s parent company withdrew its initial public offering, a week after the company ousted the founder, Adam Neumann, as its chief executive officer because of "Neumann’s unusually firm grip on the company." After the ousting, the company planned to address governance issues.
  • The company decided to postpone its IPO to focus on the core business and fundamentals to remain strong even though the company still failed to excite investors who raised concerns about its continuous losses and business model that involves taking long-term leases and renting out spaces for short terms.
  • WeWork raised $12.8 billion in funding.
  • Headquarters: New York, New York

Impact on the Investors

  • SoftBank, which owns nearly a third of the We Company, invested in the startup at a $47 billion valuation in January 2019, but investor skepticism forced it to consider a potential IPO valuation as low as $10 billion in September.
  • The company experienced a price drop which "drove its yield to nearly 11.75%, and its benchmark spread—a measure of the added compensation demanded by investors to hold the risky paper relative to safer government securities—mushroomed to more than 10 percentage points, the widest ever. Investors increased their measure of the added compensation to hold the risky paper relative to safer government securities (benchmark) to more than 10 percentage points."

Impact on the Company

  • After announcing the withdrawal the company’s high-yield bond price slid to a record low. The company sold its $669 million junk bond in April 2018 which plunged to a record-low price with the last bid at 84.5 cents on the dollar, down 2.5 cents on that day.
  • WeWork is also under pressure to find new sources of capital given that it has a $6 billion loan deal with banks, hinged on a successful share sale of at least $3 billion.
  • According to Reuters, the firm looks to trim its workforce and slow down its expansion to burn through less cash and be less dependent on fresh funding.

Case Study #2: SmileDirectClub

Background Information

  • SmileDirectClub provides at-home invisible aligners which are a series of tight-fitting, custom-made plastic aligners that gradually shift teeth into their desired position. The company has pioneered teledentistry by matching patients with endorsed local SmileDirectClub dental professionals in their area for virtual office visits to prescribe and oversee treatment. By removing constant office visits and utilizing emerging technology SmileDirectClub can provide aligner therapy at less than half the price of traditional channels while still ensuring a quality standard of care through its network of affiliated licensed dental professionals.
  • SmileDirectClub raised $1.35 billion in an initial public offering in September 2019.
  • SmileDirectClub, which sells plastic teeth-aligners online and at over 300 stores, priced its shares at $23 a day before the IPO, above the proposed range of $19 to $22 per share. This was overvaluation of $9 billion, up from the $3.2 billion it was valued at 11 months prior in its latest funding round. Forbes cites that the above-range pricing was driven by an oversubscription to the offering.
  • Shares traded at $13.95 despite J.P. Morgan's new recommendations, with a price target of $31 and less enthusiastic Credit Suisse with a target of $18.
  • SmileDirectClub IPO came at a time of rapid growth but widening losses. The company's revenue jumped 190% to $423 million in 2018 and climbed another 113% in the first half of 2019 to $373 million.
  • Losses, which totaled $75 million in 2018, more than doubled the $33 million losses from 2017. The losses are attributable to heavy marketing spend that funneled more than half of 2018 revenue to ads on social media, television, and billboards.
  • Headquarters: Nashville, Tennessee

Impact on the Investors

  • Cofounders Jordan Katzman and Alex Fenkell, have stakes in the company valued at $1.3 billion and $1.2 billion, respectively. Based on the stock price after the first day of trading, Katzman’s father, David Katzman, CEO and chairman of the company, has a class B share valued at $1.6 billion.
  • All three sold a portion of their stock—for over $100 million apiece.

Impact on the Company

  • Forbes indicates that the SmileDirectClub shares suffered a steep loss on their first day of trading, sinking 27% to close at under $17 on the second day of trading on the NASDAQ.
  • The company's stock price dropped by 40% less than the recommended prices.
  • The IPO was an underperformance after an overvaluation of approximately $9 billion to only $1.35 billion.

Case Study #3: Wanda Group Sports

Background Information

  • Wanda Sports Group is a global sports events, media, and marketing company with a mission to unite people in sports and enable athletes and fans to live their passions and dreams. Their businesses, including Infront and Ironman. The company reports to "have significant intellectual property rights and long-term relationships and broad execution capabilities" which enables them to deliver unrivaled sports event experiences, creating access to engaging content and building inclusive communities. The Wanda Sports Group offers a comprehensive array of events, and marketing and media services through three primary segments: mass participation, spectator sports, and digital, production, sports solutions (DPSS).
  • Wanda Sports, has partnerships with FIFA and the Chinese Basketball Association, owns sports properties, and generates revenue from events, sponsorships, and media pacts.
  • The Wanda Sports Group company fell 36% in its trading debut after its initial public offering in the United States raised only $190 million, less than half of its earlier goal for the listing of $1 billion.
  • The American depositary shares priced the IPO at $8 but opened at $6. The shares ended the day worth only $5.16 per share, valuing the Beijing-based company at $705 million after the second-worst debut on a US exchange.
  • According to Crunchbase, the initial IPO valuation was $1.6 billion.
  • Its offering was led by Morgan Stanley, Deutsche Bank AG, and Citigroup. The shares are trading on the NASDAQ Global Market under the symbol WSG.
  • The company's revenue was approximately $1.2 billion in 2018.

Impact on the Investors & the Company

  • Wanda Sports Group and some of its investors originally sought to sell 33.33 million shares for $12 to $15 each but because of insufficient demand, the owner of the Ironman triathlon brand had slashed the size and price range before the offering. The targets were lowered to 28 million shares for $9 to $11 each.
  • Some of the existing shareholders of Wanda Sports Group abandoned plans to sell 13.3 million of their shares ending the offering at 23.8 million shares.
  • The company's debut IPO crash adds to the poor performance of Chinese companies that have gone public this year in the United States.

Sources
Sources

From Part 05
Quotes
  • "(Reuters) - WeWork’s parent The We Company on Monday filed to withdraw its initial public offering, a week after the SoftBank-backed office-sharing startup ousted founder Adam Neumann as its chief executive officer."
  • "The withdrawal of its IPO prospectus formalizes the end of the New York-based company’s pursuit of a near-term listing and allows Neumann’s successors to proceed with the company’s financial turnaround without disclosing as much information publicly."
Quotes
  • "SmileDirectClub raised $1.35 billion in an initial public offering on Thursday, defying challenges from dentists and regulators and cementing the billion-dollar fortunes of its two founders and the father of one of them."
  • "The Nashville-based company, which sells plastic teeth-aligners online and at over 300 stores, priced its shares at $23 on Wednesday evening, above the $19 to $22 proposed range. That gave the company a valuation of $9 billion, up sharply from the $3.2 billion it was valued at 11 months ago in its latest funding round. The above-range pricing was driven by an oversubscription to the offering, according to a person familiar with the matter."
Quotes
  • "(Reuters) - Several “buy” ratings from SmileDirectClub’s SDC.O IPO banks failed to stop its stock from dropping 5% on Monday, reflecting Wall Street’s deepened distaste for money-losing startups in the wake of WeWork’s botched attempt to go public."
  • "Underwriters of SmileDirectClub’s Sept. 11 initial public offer, including JPMorgan, Bank of America Merrill Lynch and UBS, launched analyst coverage of the Nashville, Tennessee-based company, with all recommending investors buy the stock. Most brokerages assigned price targets below SmileDirectClub’s $23 IPO price. Including Monday’s drop, SmileDirectClub has tumbled 40% from that level."
Quotes
  • "Co-founders Alex Fenkell and Jordan Katzman first met at summer camp at age 13, a time when most smiles come fully loaded with wires. The two remained friends, and years later, reflecting on Alex’s metal-mouthed youth, they decided there had to be a better and more affordable way to straighter, whiter teeth. Teaming up with Camelot Venture Group, experts in creating opportunities in highly regulated industries, they sought to democratize orthodontics with SmileDirectClub."
  • "Founded in 2014, SmileDirectClub now represents 95% of the doctor-directed at-home clear aligner industry. We've helped over 700,000 people transform their smiles – their before and happily ever after photos speak for themselves. We have grown to more than 5,000 employees with 300 SmileShop locations and counting."
  • "Our clear aligners are BPA-free. Every customer receives several sets of custom, tight-fitting clear aligners to gradually shift their teeth into the desired position, a process that takes, on average, 6 months. The best part? SmileDirectClub clear aligners are 60% less than the price of other teeth straightening options and usually don’t require any office visits."
Quotes
  • "Wanda Sports Group Co. fell 36% in its trading debut after its U.S. initial public offering raised only $190 million, less than half its earlier goal for the listing. The American depositary shares priced in the IPO at $8 and then opened at $6. The shares ended the day worth only $5.16 a share, valuing the Beijing-based company at $705 million after the second-worst debut on a U.S. exchange this year."
Quotes
  • "Wanda Sports Group is a global sports events, media and marketing platform with a mission to unite people in sports."
Quotes
  • "Wanda Sports Group is a global sports events, media, and marketing platform with a mission to unite people in sports. The company has significant intellectual property rights, long-term relationships, and broad execution capabilities, enabling the company to deliver sports event experiences, creating access to content and building inclusive communities."
  • "The company offers a comprehensive array of events, marketing and media services through three primary segments: Mass Participation, Spectator Sports and Digital production"
Quotes
  • "Wanda Sports Group is a leading global sports events, media and marketing platform with a mission to unite people in sports and enable athletes and fans to live their passions and dreams. Through our businesses, including Infront and the IRONMAN Group, we have significant intellectual property rights, long-term relationships and broad execution capabilities, enabling us to deliver unrivalled sports event experiences, creating access to engaging content and building inclusive communities. "