Summary List Placement
When Roblox CEO David Baszucki told employees in mid-December that he was postponing the company’s initial public offering slated for later that month, the decision threw tens of millions of dollars in revenue for Wall Street underwriters into doubt.
When the company updated its plans less than a month later, via press release on Jan. 6, it was easy to see why. The company said it was ditching the traditional IPO in favor of a direct listing.
Instead of six underwriters who had been tapped to help with selling and distributing the stock in the IPO, the amended prospectus that Roblox put out two days later said it will use just two financial advisors for its direct listing: Goldman Sachs and Morgan Stanley.
JPMorgan, Allen & Co, Bank of America, and RBC Capital Markets no longer appear in the filing, which means they won’t get league table credit for their work unless the company hires them as financial advisors. A source familiar with the new-look deal said they would likely still get some compensation for the time and resources they had put into prep for an IPO.
Read more: In an email to employees, Roblox CEO explains why a new round of funding at a $30 billion valuation is better for employees than an immediate IPO
It also means they won’t be in a position to apportion shares to favorite hedge funds or mutual-fund clients at a discount, eliminating a mechanism by which those clients typically deliver some value back to the banks in the form of trading commissions, according to University of Florida finance professor Jay Ritter. The commissions are often much bigger than the IPO fees.
“On average, the fees paid to advisors in direct listings are far below the underwriter gross spreads charged in IPOs,” Ritter said in an email, adding that more banks typically split the bigger fee on the IPO while fewer advisors get a bigger percentage of the smaller fee on the direct listing.
“More importantly,” he said, “a big source of profits for underwriters with traditional IPOs comes from their ability to allocate underpriced shares to their favorite clients, such as hedge funds. These hedge funds are willing to overpay on other trades, in order to get favorable IPO allocations.”
An increasingly heated debate over IPOs
These allocations are at the center of an increasingly heated debate between proponents of direct listings, like Ritter and Benchmark’s Bill Gurley, and those in favor of keeping the traditional IPO process intact, such as many Wall Street banks and Andreessen Horowitz partners Alex Rampell and Scott Kupor.
Even so, Roblox’s jilted underwriters are still likely to get paid, according to people familiar with the process. In preparation for the traditional IPO, the banks provided advice around the drafting of the prospectus and research capabilities, and the company is likely to reward them for that work, one of the people said. The exact terms of the fees haven’t been worked out.
A second person said two or three of …read more
Source:: Business Insider