Doc's Daily Commentary

Mind Of Mav

Why Is The IPO Process Broken?

Something I need to really stress is that the shift towards SPAC IPOs vs. Traditional IPOs is about more than just stocks.

You see, Traditional IPOs are the bread-and-butter of Big Finance & Wall St. An IPO was literally a central plot point of The Wolf Of Wall St.

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But, just like how The Big Short, another movie depicting Wall St., showed us, the financial instruments Wall St. uses can become grossly corrupted.

In the case of 2008, it was the Mortage-Backed Security, but today it’s the Traditional IPO.

Thankfully, the IPO won’t cause a global financial meltdown (like the MBS did), but its problems will cause a paradigm shift.

So, what’s the problem with the Traditional IPO?

There are two key problems with IPOs in general:

  • They tend to occur when the overall market is at a peak.

  • The issuing company usually will IPO when it’s “hottest”, i.e., has the most hype.

However, that has more to do with market dynamics and less to do with the IPO itself.

There are always going to be vehicles for hype . . . yes, even you, Hertz.

Who's next on the list? : wallstreetbets

So, aside from the fact that any IPO model, be that the Traditional one or SPAC IPOs, will have unsustainable hype surrounding it and inherently be risky, what can be said about the Traditional IPO model itself . . . and what’s wrong with how it works?

What Wrong With The Traditional IPO

Simply put, it’s broken.

More specifically:

  • The pricing structure is all out of whack, and

  • The fees banks charge are downright criminal

Suffice to say, the traditional process for pricing an IPO has increasingly swung financially in favor of investment bankers and their clients.

Sure, greedy bankers are about as surprising as the sun coming up or the Cleveland Browns disappointing their fans . . .

Reactions to Cleveland's Loss in Baltimore | 98.5 WNCX

. . . but let’s start with understanding the general process & flow of the Traditional IPO process:

Companies declare that they plan to go public, they select an investment banking team to work with, the bankers set up a roadshow full of presentations from management, an IPO price is set, and the company eventually enters the public equity markets at the pre-determined price per share.

Seems uncomplicated, right?

Well, in the next article, we’ll cover why the whole process is busted.

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