Below is the time series of the share price of Snap Inc., which performed its IP
ID: 2802845 • Letter: B
Question
Below is the time series of the share price of Snap Inc., which performed its IPO in
March 2017. Read the two articles below and answer the following question.
Article 1) 2017 Initial Public Offering (from Wikipedia)
In January 2017, The Wall Street Journal reported that "people familiar with the matter" stated
that Snap Inc. would share 2.5% of the money raised in an upcoming initial public offering (IPO)
with the banks managing the IPO. It also reported that after the predicted March 2017 IPO, the
two Snap co-founders would hold over "70% of the voting power" in the company, and own
around 45% of the total stock. On January 29, 2017, it was reported that the Snap Inc. IPO would
likely take place on the New York Stock Exchange. As both the NYSE and Nasdaq had been
"aggressively courting the listing for more than a year," the Wall Street Journal called it "a big
competitive victory for the Big Board." Snap's IPO was estimated to value the company at
between $20 billion and $25 billion, the largest IPO on a US exchange since Alibaba debuted in
2014 at a value of $168 billion. Beyond the two founders, the two biggest shareholders for the
planned early 2017 Snap IPO were Benchmark and Lightspeed Venture Partners, both prior
investors and venture-capital firms from Silicon Valley. They held a combined stake of about
20%. On March 1, 2017, it was reported that Snap Inc. "values itself at nearly $24B with its IPO
pricing".[56] Snap Inc.'s stock started trading on March 2, 2017 under the symbol SNAP, on the
New York Stock Exchange.
When Snap reported earnings for the first time in May 2017 they reported a $2.2 billion quarterly
loss and the stock fell more than 20%, erasing most of the gains since the IPO.
Google reportedly offered Snap $30 billion in 2016 for acquisition, which Snap turned down
Article 2) http://fortune.com/2017/07/10/snapchat-snap-stock-ipo-lock-up/
Question) Explain the time series pattern of the share price of Snap Inc after its IPO. You
should mention the following concepts that we studied during the lecture in your analysis.
Your answer should be less than 40 lines with the font size of 12.
- arbitrage
- lockup period
- offer price (IPO price)
- efficient market
- skewness preference
- voting right
- IPO underpricing
Explanation / Answer
The stock price of SNAP is falling after reaching a high of $24 on listing, a gain of 41% over the price at the which the company posted for listing, the IPO price of $17. Thought the IPO initially seemed underpriced, as it soared to $24 right after the listing, $7 above the IPO price, the stock was not able to maintain this level for long and starting falling and reached below the IPO price of $17 around mid June as the company was nearing the end of the lock in period on June 29th. Investors who became a part of the IPO cannot sell the shares during the lock-in period.
The company has lost of investors, who would want to exit the stock as the lock in period ends as they currently are not expecting a huge return from the stock, giving it a negative skewness. Among these are many people who might stiil benefit even if the stock tumbles below it offer price. They are the ones who have been alloted shares before the IPO as an ESOP or other incentives at a very nominal price. They are the ones who will benefit from the arbitrage opportunity.
The market is driven by sentiments and many other macro economic factors, hence the market price of the shares is always not equal to intrinsic value. Though gradually in the long run the stock adjusts its value to be close to the intrinsic value.
Another impact the an IPO or any additonal issue of shares has on the company is the dilution of voting rights as the company becomes owned by a larger group of people. As suggested in case of SNAP, there woul not be an dillusion of voting rights as the IPO shares not entitiled to voting. Even after holding 45% of the total stock, the cofounders would hold 70% of voting rights.
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