« Back to Home Page

Zipcar Golden IPO’s Dark Lining: a $50 Million Blunder by Underwriters

Steve Puma | Thursday April 28th, 2011 | 5 Comments

A ZipCar Min Cooper in ManhattanOn April 13th, Zipcar, the well-known, and wildly popular, car-sharing company, was celebrating a key milestone in every start-up’s growth: a very successful initial pubic offering (IPO) of its stock, to the tune of $180 million raised. By the next day, the company’s stock was up to $28 per share, a rise of 60%, over its initial price of $18 per share.

To most, this would seem like a pretty amazing day for everyone involved. However, as Business Insider’s Henry Blodget points out, this was not the case. Although a huge jump in stock price is great for institutional investors, who will earn the difference in price, when their Zipcar stock is re-sold, it means that the company missed over $50 million in potential earnings from their sale of stock!

Blodget accuses Zipcar’s underwriters, Goldman Sachs and JP Morgan, of “wildly underpricing the deal, and selling Zipcar’s stock to institutional clients, way too cheaply,” which is a staggering display of either ineptitude or outright cronyism on behalf of those investment banks.

Although IPO pricing is certainly not exact, setting an appropriate price is a huge part of the underwriters’ job. In addition, a slight discount on price is to be expected. Blodgdet explains: “it’s true that underwriters always try to modestly under-price deals, to the tune of a 10%-15% ‘IPO discount’…If there were no discount on IPOs, there would be little incentive for big investors to play ball before the offering: They’d just wait until the stock started trading and buy it then. This, in turn, would make it harder for companies to raise capital. So the modest discount, in which companies and underwriters reward investors with a good deal, makes sense.”

(Although crazy post-IPO stock rises have happened, such as during the dot-com bubble days, they usually come because of a breakthrough technology, whose amazing growth could not have been predicted. A primary example would be Google—there was simply nothing in the past to reliably compare it to.)

Goldman and Morgan’s margin goes well beyond a typical discount, and beyond the expected margin for error. Although at the forefront of the car-rental industry, the level of investor interest in Zipcar’s stock should not have been a very difficult thing for these “wizards of Wall Street” to asses. Quite the contrary: they may be all too good at it, and are simply passing the savings along to their institutional customers.

The institutions that bought the Zipcar stock last night are now 50% richer, just by virtue of being good clients of Goldman Sachs and JP Morgan. And that money came right out of the pockets of Zipcar and the Zipcar investors who sold on the deal.

Blodget doesn’t really mince words, in what he thinks is really going on (emphasis mine): “If Zipcar can sustain a price of $27 a share this morning, Goldman and Morgan should have sold it to institutions at $23-$24. [at the writing of this article, Zipcar shares were at $26.50] Because the stock was instead sold at $18, Zipcar and Zipcar’s existing investors just got screwed by Goldman Sachs and Morgan Stanley to the tune of $50 million. That is an outrageous price. And the windfall accrued to the huge institutional clients of Goldman Sachs and JP Morgan. And don’t think that Goldman or Morgan is going to let those clients forget it.”

Not being a finance lawyer or SEC regulator myself, I have no way of knowing if there is any way to prove that shady dealings were involved in Zipcar’s IPO. But, If I were Zipcar’s CEO (or any of the company’s other pre-IPO investors), April 15th would have had me asking my lawyers some very serious questions about this transaction.

At a minimum, it certainly seems that IPOs are one more area of finance that needs to be more closely scrutinized, and, perhaps, more tightly regulated.

——-

Steve Puma is Director of Business Development for SABA Motors, and a sustainability writer/consultant. His work focuses (mostly) on clean transportation, including Plug-In Electric Vehicles, something he is very passionate about.

Steve holds an MBA in Sustainable Management from Presidio Graduate School and a BA in Computer Science from Rutgers University. You can learn more about Steve by reading his blog, or following his tweets.


▼▼▼      5 Comments     ▼▼▼

Categorized: Investment & Markets|

Newsletter Signup
  • Randy Scott

    I think this is really pretty common with IPOs… it’s about VCs cashing out anyhow. It’s a stretch to say ZipCar got screwed, most would call this a pretty successful IPO!

  • Ron

    How do we know that Zipcar is worth $23 and not $10 or $12? This is a big assumption you are making….

    • Steve Puma

      Thanks for your comment.

      Let’s be clear about a few things:

      I did not, personally, make any assumptions about what ZipCar is worth, I merely quoted others.

      Stock pricing, while not an exact science, is not rocket science, either. Prior to an IPO, it is precisely the job of an underwriter to determine what a stock price should be, based upon their research about the level of interest. Post-IPO, we know exactly how much ZipCar is worth: we simply need look at the current stock price. When I wrote this article, it was $26.50/share; Today, it is $25.79/share. Since the price has remained pretty constant, we can be relatively certain that the appropriate stock price, in the current climate, should have been in the range of $25-$26, minus the 15%-20% discount for institutional investors.

      Don’t kid yourself. Investment banks know what the price of a stock should be. They have been doing it for hundreds of years. As a matter of fact, I would say that they are so good at setting stock prices for IPOs, that the only reason for not getting it within 20% of actual, would be if it was for a company that represented a complete paradigm shift in the supply/demand model for its industry. Companies such as Google or Yahoo fit this theory, at the time of their IPOs.

      • Tim

        I guess you’re giving the banks too much credit by stating “they have been doing it for hundreds of years”. And there’s a big difference between a short-term price and a long-term intrinsic valuation. I think you are making this simplification to make a political statement (which I actually agree with). I just don’t agree with how you connected the dots.

        • Steve Puma

          I don’t believe that my assertion is an over-simplification. Getting the price right, on an IPO, is extremely important, for the company attempting to raise capital. Setting an initial price, based on supply and demand, is something any first-year MBA student should be able to do. For an IPO, the supply is exactly known (the number of shares). Only the demand needs to be determined. This would be relatively easy to asses, by doing market research of a statistically significant number of potential investors. I would agree that the long-term valuation is a more nebulous concept. But this doesn’t really matter, because we are only talking about the difference between the initial stock price, and its average price, within a short, not long, time period.

          You cannot reliably do the same thing, once the stock is trading continuously on the open market, because of constantly fluctuating investor interest in the market. Determining a price, at any particular moment, then becomes quite unwieldy, because it would require constant ongoing market research.

          The difference, with an IPO, is that it is a fixed moment in time.