Silicon Valley bankers and lawyers push for an IPO alternative

Bankers and lawyers have recently recommended that companies use direct listings as an alternative to initial public offerings (IPOs). A direct listing allows a company’s shareholders to sell their existing stock on the stock exchange without having to go through the underwriting process involved in an IPO. However, a direct listing cannot be used as a means for generating capital since it does not entail the issuance of new shares.

Companies that have recently completed a direct listing are Spotify and Slack. However, especially in the case of Spotify, the companies did not require any additional capital. Therefore, there was no need for an IPO in these cases. Furthermore, Spotify’s transaction involved two components: a partial direct listing and a partial IPO.

Bankers from Morgan Stanley to Goldman Sachs and lawyers at Goodwin Procter and Latham & Watkins have argued that the underwriting banks involved in an IPO typically price shares at a price cheaper than their true market value. This is common practice among conservative underwriting banks who believe that a company’s IPO will not generate a high return. Furthermore, these advisers were involved in the Spotify transaction, and after realizing the gains from the direct listing, now seek to corner the direct listing market.

Within the IPO context, it is the SEC’s objective to get U.S. companies to launch their IPOs early, thereby increasing the total number of publicly traded companies. As a result, this would increase the number of retail investors by giving them access to buying shares on the stock exchange. However, given the criticism mentioned above, an IPO may not be the best way for a company to raise capital. Moreover, this criticism is not recent. In fact, within the context of venture capital or private equity transactions, critics question whether an IPO or a M&A transaction is a viable exit strategy. On October 1, 2019, leading venture capitalists met at an invitation-only summit in San Francisco to discuss the viability of a direct listing as an alternative to an IPO. However, the outcome of these discussions is not subject to the purview of the public.

As mentioned above, a pure direct listing does not provide a means of generating capital. Therefore, one solution is to adopt a transaction similar to that of Spotify that includes a direct listing of existing shares coupled with an issuance of new shares. An additional solution is to have companies sell private convertible notes to raise money ahead of a direct listing. This solution is based on an article circulated by Latham & Watkins in the wake of the Spotify transaction. However, critics worry that concurrently raising capital will increase first day price swings of a company’s shares after the direct listing. In any case, a direct listing appears to be a viable alternative to an IPO so long as companies do not require further capital in the short term.

Silicon Valley bankers and lawyers push for alternative to IPOs

Warren and Zuckerberg Clash Over Breaking up Big Tech

Senator Elizabeth Warren is leading polls for the 2020 presidential election and has taken a strong position against tech giants like Facebook. In March 2019, Warren introduced a proposal in favor of breaking up leading technology companies, including Facebook, Amazon, and Google. She noted in a tweet that big technology companies have “engaged in illegal anticompetitive practices, stomp[ed] on consumer privacy rights, and repeatedly fumble[d] their responsibility to protect our democracy.” Earlier this year, she expressed that she is “sick of freeloading billionaires.”

Warren’s tweet was in response to leaked recordings of Mark Zuckerberg, Facebook’s CEO, having an internal discussion with Facebook employees regarding Warren’s position, close to seven months after she rolled out her plan. There, Zuckerberg noted, “if she gets elected president, then I would bet that we will have a legal challenge, and I bet that we will win the legal challenge.”

Warren is seeking to reverse tech company acquisition activity. This includes undoing Facebook’s acquisitions of WhatsApp and Instagram, among others. Her rationale for breaking up big tech is that “tech companies [have] amassed significant power and face little competition.” Also, that they should “protect your privacy and keep misinformation out of your feed, instead of working together to sell your data, inundate you with misinformation, and undermine our election security.”

Zuckerberg has his own take on breaking up big tech, stating that “breaking up these companies, whether it’s Facebook or Google or Amazon, [is] not actually going to solve the issues” and that breaking up big tech companies “doesn’t make election interference less likely . . . because the companies can’t coordinate and work together.”

The tension between Warren and Zuckerberg shines a light on big tech antitrust law and whether more stringent regulations need to be placed on tech companies. One could ask: would reversing acquisitions slow technological advancement and disrupt synergistic alliances that only result from companies integrating their ideas, human capital, and collective technology goals? One could reason that curtailing third-party data distribution, while allowing tech acquisitions to continue, provides society with more overall utility.

Warren and Zuckerberg Clash Over Breaking up Big Tech

Peloton’s IPO Falls Flat: Implications for the Future IPO Market

On September 26, 2019, Peloton Interactive Inc. (“Peloton”) launched its IPO – priced at $29/share and ended at $25.76/share (down 11%)*. As a result, Peloton’s IPO became the second-worst performing IPO of 2019 and the third-worst debut offering since the financial crisis. Peloton offers fitness equipment integrated with a workout-streaming subscription service that can be purchased together or separately. The company raised $1.2 billion by selling 40 million shares at $29/share, and the launch of the IPO resulted in $900 million dollars of investor capital lost.

According to Peloton’s filings with the SEC, the company sells stationary bikes for $2,245, treadmills for $4,295, and connected fitness subscriptions for either $19.49/month or $39.00/month. In 2019, the company generated $915 million in revenue (up 110% from 2018) but incurred net losses of $195.6 million, which are nearly quadruple the losses from 2018.

Experts attribute Peloton’s disappointing IPO to an unrealistically high valuation of its stock price – ranging from $26/share to $29/share – as well as the company’s decision to sell at the upper limit of that range. Unfortunately, the increasingly common divergence between VC valuations and market expectations has resulted in disappointing IPO launches (Lyft and Uber), and caused companies to abandon their planned IPOs altogether (WeWork and Endeavor).

Although some may interpret this recent trend as an indicator of diminished investor confidence in the IPO market, it is likely that the disparity between valuations in the private sector and expectations in the public market is creating unreasonably high IPO prices. Professor Aswath Damodaran from NYU Stern School of Business recently stated, “[VCs are] overestimating the value of scaling up and underestimating the value of the business model.” In response, investor confidence in companies like Peloton, Uber, Lyft, and WeWork that focus solely on massive growth and scale without clearly delineating a plan to increase profitability appears limited.

Peloton launched its IPO without the typical indicators of profitability. By coming to the market at a loss, Peloton discouraged investors from having confidence in its valuation. Additionally, Peloton filed with a dual-class share structure, presumably to retain more control over the company, but this certainly deterred many investors that, as a rule, do not invest in this stock structure.

What this means for Peloton’s future remains to be seen, but it may indicate that companies looking to initiate an IPO should be more conservative with their valuations, come to the market with a clear path for profitability, and align more closely with market expectations going forward.

*When this article was written, Peloton was trading at $22.33 (down 23% from IPO).

Peloton’s IPO Falls Flat: Implications for the Future IPO Market

Vox Media Acquires New York Magazine

Vox Media announced its acquisition of New York magazine along with its digital assets in an all-stock transaction in September 2019. A press release by New York Magazine revealed that Jim Bankoff, Vox Media CEO and chairman, will continue to lead all aspects of Vox Media. Pamela Wasserstein, chief executive of New York Media, will serve as president and have a seat on the company’s board of directors. According to Bankoff and Wasserstein, the deal is a logical step, which will not diminish the brands of either company.

New York Magazine, which was first published nearly fifty-one years ago, laid off at least five percent of its staff this year and has recorded a $10 million loss each year. Earlier in the year, the magazine also witnessed its editor-in-chief, Adam Moss, stepping down after fifteen years in the position. However, amidst such changes, Jim Bankoff has recorded that there would be no personnel changes within any of the magazine’s related publications or even within any of the Vox media brands, which include The Verge, Eater, Curbed, Vox and SB Nation. This statement has been surprisingly reassuring following the large-scale restructuring of New York Magazine, which laid off sixteen full-time staffers and sixteen freelancers or part-time employees.

Many experts say that this is a merger driven by shared ambition and that Vox’s growth trajectory and success in developing premium editorial brands is a driving force of this acquisition. The combination looks to diversify various forms of media and is supported by the nature of Vox Media, which was reshaped by Jim Bankoff. At present, Vox’s model relies less on digital advertising, yet boasts of a sizable profit on a revenue of $185 million, as reported last year. The company also recently negotiated a production deal with streaming service Hulu to create a series of TV shows. The deal was followed by another production agreement with Netflix. Vox’s revenue has been further enhanced by licensing its content management system, Chorus. Keeping in mind Vox’s recent successes, the rationale behind this merger has been firmly stated by Bankoff, who calls this combination in the digital media industry, most unique and different from all those mergers in the industry which have emerged out of desperation or for pure financial engineering.

Following the consummation of this transaction, Vox Media is expected to remain profitable and perhaps even increase its revenue by $300 million by the end of 2020. Vox Media has already raised more than $300 million, which includes $200 million from NBCUniversal. Further, according to the estimations of both Bankoff and Wasserstein, the combined sites would have at least 125 million unique monthly visitors. While the value of this transaction remains undisclosed, it is expected to close later this year.

Vox Media Acquires New York Magazine

Op-Ed: Taxing Wall Street Traders

High-frequency traders have turned Wall Street into a casino. They spend millions of dollars on super high-speed internet and develop complex computer algorithms so they can quickly find out what you are willing to pay for a stock, buy it for slightly less, and then sell it back to you at a profit, taking money right out of your pocket. What’s worse, this type of speculation is exactly the type of irresponsible behavior that led us to the Wall Street crash of 2007. Once again, the rich are making risky bets and we might all be left holding the bag. But we can fix this.

Senator Brian Schatz from Hawaii has proposed a bill which would add a .01% tax on all purchases of stocks and bonds. This is an excellent idea because it would raise billions of dollars for the government to invest in healthcare, education, and infrastructure. It would also deter these high-frequency traders from investing in ways that provide no social benefit to companies while increasing instability in the market. The brunt of the tax burden would fall on the richest 10% of American’s while barely affecting your average household investor or pension fund. And it would lessen Wall Street’s influence in Washington DC.

Almost everything that you and I buy every day is subject to a sales tax. I spend most of my income at Safeway, Target, the gas station, and restaurants. I pay taxes on everything I buy at these places and I’m sure my landlord factors her property taxes into the rent she charges me. Wealthy people spend most of their money at the stock market and don’t pay any tax on what they buy there. This seems unfair. If we can raise $75 billion a year while still letting rich people profit from a market that we all support, shouldn’t we?

Bill Gates, George Soros, and the Pope all support this tax, and the UK, South Korea, France, China, and many other countries all have their own. It is time we do the same.

Rising Litigation Costs Pressure Bayer and J&J to Settle Xarelto Lawsuits

In late March, Bayer and Johnson & Johnson settled more than 25,000 lawsuits surrounding Xarelto, a blood thinner medication jointly developed by both companies. This $750 million settlement was in response to thousands of allegations that Xarelto causes uncontrollable bleeding leading to severe bodily injury and death. In addition to winning all six cases that went to trial, both companies continue to deny any and all responsibility associated with the alleged harmful side effects of Xarelto. So, why did both companies decide to settle?

While all pending cases were settled for a total of $750 million, Bayer and J&J are equally footing the bill. Therefore, both are responsible for less than $390 million. Moreover, Bayer’s product liability insurance will offset this figure substantially. Thus, on its face, the burden this settlement will have on both Bayer and J&J appears minimal.

In 2018, J&J’s Xarelto sales encompassed $2.5 billion of its total revenue. However, this figure is dwarfed by the company’s total $78.7 billion revenue in 2018. As for Bayer, Xarelto contributed $4.07 billion to their revenue streams last year. Moreover, as compared to similar lawsuits, this settlement is quite low. For example, amidst comparable allegations to those made within the complaints against J&J and Bayer, Boehringer Ingelheim recently settled 4,000 cases for nearly $650 million. In comparison, J&J and Bayer’s financial exposure is substantially less.

With that said, this recent settlement follows a significant increase in total litigation exposure for both companies. In March, Bayer announced that the Xarelto settlement allows both companies to move forward unencumbered by future costly and time-consuming litigation. For instance, J&J spent $1.72 billion on litigation last year alone. This figure is nearly double the amount spent in 2016. As for Bayer, after recently acquiring Monsanto Co., the company has been subject to many toxic tort claims. For example, after losing two cases involving Mansanto’s popular weed-killer, Roundup, Bayer’s stock took a hit in late March of this year. Thus, while the settlement amount encompasses a small portion of Bayer and J&J’s revenue in 2018, the litigation expenses associated with the Xarelto lawsuits were substantial. This suggests that settlements of this kind will remain crucial tools for large companies to avoid incurring excessive litigation costs, evade liability, and, ultimately, continue keeping investors happy.

Rising Litigation Costs Pressure Bayer and J&J to Settle Xarelto Lawsuits

Investigator Claims Saudi Arabia Had Access to Bezos’ Phone

Last week, Amazon founder Jeff Bezos’ personal security consultant Gaven De Becker went public with findings that concluded “with high confidence that the Saudis had access to Bezos’ phone.” Following The National Enquirer’s publishing of Jeff Bezos’ intimate text messages with Lauren Sanches, Bezos hired investigators to look into who was behind the data breach and subsequent leak to the controversial tabloid. The revelation took America by storm—the idea that the richest and most well-connected man in technology could have his personal data stolen is one that remains deeply unsettling. In addition to the probe, Bezos released a personal statement on Medium, wherein he exposed AMI, the parent company behind The National Enquirer, for what amounted to extortion before going public with the text messages.

The implication of Saudi involvement is not all too surprising, given The Washington Post’s unrelenting coverage of the murder of its columnist Jamal Khashoggi within the walls of a Saudi consulate. The coverage helped lead Saudi Arabia’s attorney general to concede that the murder was premeditated, and the CIA to conclude the Crown Prince himself as the mastermind behind the killing. As the owner of the Post, Bezos clearly had a target on his back.

The Saudi campaign against Bezos is not an isolated incident. According to Becker, Saudi Arabia attacks people in many ways, utilizing an extensive social media program that sometimes plants operatives within the company hierarchies themselves. It is thought that one of these many insiders may be AMI CEO David Pecker himself. The connections between Crown Prince Mohammad bin Salman, Pecker, and Donald Trump are conspicuous: Pecker bringing an MBS intermediary to the White House, publishing a pro-MBS magazine titled “The New Kingdom” shortly after a meeting with the Prince, and reports of AMI sending advance copies of the magazine to the Saudi Embassy.

To better understand the full picture of the Bezos debacle, it is important to understand that historically innocuous tabloids have become increasingly intermixed with politics, as the U.S. Attorney in the Southern District of New York emphasized in its case against Michael Cohen. Becker explains, “Though relatively benign at first, the Trump/Pecker relationship has metastasized: In effect, the Enquirer became an enforcement arm of the Trump presidential campaign and presidency.” Although there is no concrete evidence that indicate the Kingdom ever gave AMI the text messages that were released, the evidence is convincing.

Both AMI and the Saudi government have since released public statements, denying any involvement by the Saudis.

Investigator Claims Saudi Arabia Had Access to Bezos’ Phone

Boeing’s Shortcuts Prove Shortsighted

The Department of Justice is investigating Boeing following two crashes of its 737 Max 8 plane six months apart—the first a LionAir flight out of Jakarta, and the second an Ethiopian Airlines flight out of Addis Ababa.

The investigation of the world’s largest commercial airline manufacturer relates to Boeing’s business decisions regarding its nearly 400 737 Max 8 models operating around the world. More specifically, the investigation will likely focus on the ways in which Boeing cut costs and skirted FAA scrutiny to expedite its production of 737 Max 8 planes using a slightly modified original design save for a bigger engine. This decision—to only slightly modify the design of the 737 Max 8 so as to accommodate bigger, and more fuel-efficient, engines, rather than re-designing the plane completely—was allegedly the product of fear that Airbus would capture the market. In 2010, Airbus, Boeing’s only real competitor in the market for narrow-body commercial planes, had released its new A320neo model with efficient engines that presented a real competitive advantage over Boeing’s existing 737 models.

Because the bigger engines in the slightly modified 737 Max 8 design changed the aerodynamics of the plane, Boeing installed a special Maneuvering Characteristics Augmentation System (MCAS), which could override pilot decision-making. The current theory as to why the LionAir and Ethiopian Airlines flights crashed is that faulty sensors overreacted to the normally high angles of attack the planes assumed for takeoff, triggering the planes’ MCAS systems, which forced the noses of the planes down, and ultimately, into the ground.

If these preliminary findings are borne out, Boeing’s shortsighted decision to take shortcuts in its pursuit of more fuel-efficient engines—which has already cost the company $40 billion in market capitalization and has mired it in a public relations nightmare—could expose it to massive criminal liability.

Boeing’s Shortcuts Prove Shortsighted

Hustle & Motivate: Nipsey Hussle’s Work to Bridge the Gap between Hip-Hop, Technology, Business, and Minority Communities

The minority business community mourns an influential and monumental businessman who passed away last Sunday in the community he worked hard to redevelop. Grammy-nominated artist and Los Angeles native Nipsey Hussle, born Ermias Asghedom, was a pillar who laid the foundation for the change breeding in the Crenshaw district, change wrought with technological advances and financial freedom.

Nipsey has lived out the potential for change he once sought as a youth in inner-city Los Angeles, an environment that gang culture dominated. Hussle saw no outlets for youth to develop interests beyond entertaining or playing sports. Calling attention to the lack of diversity in the science, technology, engineering, and mathematics fields, Nipsey and his business partner David Gross launched Vector 90, a combination co-working space and STEM center, in the Crenshaw District. The 2-story center will serve as a conduit between young talent from impoverished neighborhoods and corporate partners in Silicon Valley and beyond.

Emphasizing the importance of financial freedom and economic mobility through his voice and actions, Hussle pioneered a number of innovative measures in marketing and self-promotion. His strong entrepreneurial spirit led him to employ what he dubbed a “Proud2Pay model,” making two of his mixtapes available for free download and selling a limited number of physical copies at a premium. He continued to leverage the relationship between culture and commerce through his business strategies. In achieving vertical integration, a business concept that combines multiple stages of production into one company, Nipsey controlled the musical fine-tuning from production to consumption, allowing his storytelling to yield authentic experiences that resonated with listeners instead of being controlled by “radio gatekeepers” or record labels.

His smart store, The Marathon Clothing, part of a sect of a strip mall he purchased and was working to redevelop into community-integrated commercial units, was only a start to his bridging the gap between culture, technology, and communities that so desperately need champions of their interests. Nipsey was one who understood the needs, struggles, and values that connected communities on both sides of the class system, having lived experiences on the street and in the boardroom, and his ability to communicate that through his brand is what made him genius. Hussle once said that the highest human act is to inspire.

Hustle & Motivate- Nipsey Hussle’s Work to Bridge the Gap between Hip-Hop, Technology, Business, and Minority Communities

Uber Has Acquired Careem to Expand in the Middle East

On March 26, 2019, Uber announced its agreement to acquire its Middle East competitor Careem Networks for $3.1 billion. Careem is a technology platform extending from “Morocco to Pakistan, Turkey to Sudan.” The app is popular among countries that prefer to use cash over credit. Careem’s success comes from its in-depth local knowledge and expertise, which caters to young tech-savvy populations.

Mapping is a vital aspect to ride-sharing apps because it allows drivers to know where to pick up and drop off customers. While Uber uses various mapping resources, the company relies on Google Maps the most. Google Maps falls short in its mapping efforts throughout the Middle East, which pushed Careem to take over. Google Maps falls short because it lacks the precision needed for a ride-sharing app. Meanwhile, Careem had already mapped over 45,000 miles for its taxi service.

Mapping requires a significant investment because it is primarily a manual process where each block in each neighborhood is documented. Uber’s acquisition of Careem will benefit both companies while still allowing them to operate separately. Careem will continue as an independent brand, which will enable both companies to build new products and try new ideas. As the companies progressively integrate, they hope to operate more efficiently. Uber hopes the integration will produce lower wait times, stimulate innovation in the region, and allow for an expansion of new products like high-capacity vehicles and payments.

The Middle East is growingly becoming an essential market for technology innovation and investment. Last year, $3 billion in technology investments were raised in the region. Ala’ Alsallal, the founder and CEO of Jamalon, a bookselling and buying platform, stated, “My mission is to … get connected, and [close] the gap between what we have access to and what the West has access to.” For several reasons, like war, widespread corruption, and conservative ideals, the Middle East is a difficult place to live and start a business. Technology platforms play an important role in providing access to services.

The Middle East is not the only region in the world where people fall behind in access to services that folks in “the West” have an abundance of. If successful in increasing technology innovation, I believe the region will be an influential example to other areas in the world, like Latin American. Increased technological innovation and access in the Middle East means more connectivity with the region and the rest of the world. I hope this increased access to services and connectivity will lead to an increase in positive narratives of the Middle East and its people.

Uber Has Acquired Careem to Expand in the Middle East