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As we know, Uber (UBER) is preparing to launch its initial public offering. We just had Lyft's (NASDAQ: LYFT), which we might assume directly related to how Uber can set prices. We also had more recently Pinterest (NYSE: PINS) and Zoom (NASDAQ: ZM).
When Lyft came on the market, I pointed out that their IPO had an impact, which was a sign of failure. They are now well below emissions, so, to my measure, it's a success. According to the more conventional measures, Pinterest and Zoom are great successes because, at my level, they are well above the emissions. And to my measure, they are failures.
The difference in the measure of success or failure here comes from different perspectives on who the market really is here. In economic terms, we combine the problem of primary agents with that of the double-sided market. The combination forced us to use a third economic concept, game theory, to understand everything.
This difference between a price increase perceived as a success or a failure is to determine who is the clientele of the IPO process. My point of view is that the customers, regardless of the impact, are the sellers of the stock. To leave money on the table is therefore a failure. To be able to sell something today beyond what he will get tomorrow is a success. Thus, a price drop after an IPO is a success of the process.
It is quite possible to say the opposite and to say that it is the investors who are the customers. Thus, a pop is a sign of success.
It is here that we come to the double-sided market whose study has earned Jean Tirole his Nobel. The archetype is the newspaper. This is selling journalism to readers and at the same time attracting readers' attention to advertisers. Google sells us research, it sells our eyes to advertisers. Facebook and so on – all double-sided markets. So also the process of IPO. The market as a whole sells investment opportunities to investors but also money from investors to those who sell investment opportunities. There are two groups of customers here and it is unlikely that both parties are completely satisfied with a transaction.
Add to that the main problem / agent. The sellers of the shares on the stock market are very interested in the price that their specific offer gives them. Their agents, the participants in the IPO market, are much more interested in the idea that the transaction continues and that the pipeline of transactions continues than they are in the specific price of a given transaction.
The chapter on real estate agents in Freakonomics is good empirical evidence. When they sell their own properties, they get prices rather higher than when they sell properties apparently equivalent to their customers. They also take longer to sell to get this prize. It is the difference between their functioning as donors and not as agents.
The fact being that earn 6% of a 5% higher price (to make up for the figures and the US experience, use 2% as a commission for real estate agents in England) might not be worth it. interest of the real estate agent. Better to make the deal and earn 6% of the lowest amount now. When it is their own property, when acting as an agent and not an agent, the highest price is retained – 5% of the capital is worth it.
In other words, agents do not always work in the best interests of constituents. The IPO market works in this way. The banks and the various funds are much more interested in the series of transactions that they can realize at 7% (the usual costs) compared to the last percent of the price of a transaction.
Of course, an undervalued IPO will mean fewer sellers use them in the future, which is a bad thing. Never a pop to have will leave few investors subscribe to future offers. The net effect being that the interests of the system and the process are quite different from those of the orderlies, the sellers of shares in the context of an IPO.
It is so that we can have different points of view on the existence or not of a popular success or not.
We must now add another element of economic theory, the game theory associated with John Nash and his Nobel. Because to determine what might happen to Uber's IPO, we need to think about the varied interests of these different participants and how they will interact.
Uber will want the highest possible price for the stock sold during the IPO. They do not care at all about the general health of the IPO system. The organizing banks pay a little attention to the highest price. Hey, of course, 7% more, that's more. But they are much more interested in the long-term health of the IPO Pipeline, because that's where the career and business is in the long run. So we invigorated Uber's dreams of price maximization because for market participants, 7% of the transaction flow represents more than 7% of the last dollars of the Uber transaction.
So what will be the general reaction to prices?
With Zoom and Pinterest showing healthy pops, we might think that Uber will reach the top of any potential lineup. The market is healthy, they will be able to come out leaving very little for any pop.
And yet, Lyft. It is the most closely comparable company. And as it has been a disaster for new investors, we could expect a price to be at the bottom of the valuation range.
My best bet is that the Lyft example will prevail. We could hear a lot about how it was the anomaly, that the pipeline and the market are generally healthy. But in the minds of investors, I think both, Uber and Lyft, are so closely related that it is this view that will prevail. Thus, the lower the stock of Lyft, the closer we get to the Uber price, the lower the price. That is to say that the lower limit of Lyft is lower than the show, the more I expect to see room for a nice pop on Uber.
My analysis could of course be false and we will certainly know it. The reason why the above is so long is that you can see the logic leading to the analysis. This combination of double-sided markets and the main problem / agent means that the more we perceive that the Lyft IPO is deteriorating at the time of Uber pricing, the more pressure there will be for make sure the price is low.
Disclosure: I / we have / we have no position in the actions mentioned, and we do not intend to initiate a position within the next 72 hours. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose shares are mentioned in this article.
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