Good job Slack I don't want to say that if Slack Technologies Inc. had gone public through a traditional initial public offering, it would have done so at a $26 IPO price, because I don't think that's particularly true. Slack went public through a direct listing yesterday, and on Wednesday evening it announced a "reference price" of $26, but that reference price was just sort of a weird curiosity of New York Stock Exchange procedure. It was informed by views from Slack's bankers, by the recent trading of Slack's stock in private markets, and perhaps by some sense of the supply and demand for Slack's stock once it went public. But it certainly wasn't as well informed as an actual IPO price would be: Slack's bankers didn't get firm orders to sell a fixed number of shares, go out and market those shares, get firm orders to buy those shares at a fixed price, and then price the deal at that price. They just sort of eyeballed a price. That price might have been their best guess at what an IPO price would have been, but you don't have to interpret it that way, and in any case it was a guess with no money on the line: No shares were sold at $26, so the consequences of getting it wrong were minimal. Slack's actual opening price, when it started trading a little after noon yesterday, was $38.50. That's the price that was set in the opening auction at the New York Stock Exchange, in which Slack's pre-IPO shareholders put in orders to sell their stock and potential public investors put in orders to buy. A lot of shares were sold at that price. Some 45.5 million shares crossed in the opening auction, according to Bloomberg data, and since Slack was not public the second before that auction, you can reasonably assume that every one of those shares was sold by a pre-IPO private holder of Slack. In a crude sense, that was Slack's "IPO," the big coordinated transaction in which a bunch of its private shareholders first sold their shares to the public at a fixed price. It was for 45.5 million shares at $38.50, or about $1.8 billion, a healthy size for an IPO. It represents about 9% of the company's stock and would be the fourth-biggest U.S. IPO of 2019 so far, if it had been an IPO. A total of about 137 million Slack shares traded yesterday, and probably a lot of that volume was just public investors recycling the 45.5 million shares that came loose in the first second, but probably some of it wasn't: Probably some pre-IPO Slack investors waited to see how the opening auction went and sold their stock minutes or hours later, increasing yesterday's total supply. But if you were a pre-IPO investor, it didn't matter all that much when you sold yesterday. The stock traded as high as $42 and as low as $38.25 during its first afternoon of trading, before closing at $38.62. That's not a wide range for a first day of trading, and the fact that it closed almost exactly where it opened is kind of impressive. Not that Slack or its bankers or whoever should be congratulated for it, but the market did a good job. If you take the closing price as the "correct" price for Slack's stock,[1] the price where it settled after everyone had a chance to inform themselves and do the trades they wanted, and if you take the opening auction price as an early tentative prediction of what the correct price would be, then the prediction was quite good. The people who sold in the opening auction didn't leave much money on the table; the people who bought didn't get a big first-day windfall but also didn't overpay; it was all pretty efficient. Which is reasonable, of course; most of the time the opening price of a stock is a good predictor of its closing price that day. Most big news about companies is announced outside of trading hours; certainly not much news came out of Slack during trading yesterday afternoon. If $38.50 was a good price at noon, it stands to reason it would be a good price at 4 p.m. Usually, though, the opening price is close to the previous day's closing price, too, and the trading dynamics one day are not too different from the dynamics the previous day. Slack didn't really have a previous day's trading, or a previous closing price.[2] The market started, as it were, from scratch; it woke up yesterday morning to run an auction to find the right price for a stock that hadn't traded before, and it did a good job. It was not obvious that this would be the case—maybe no one would want to sell on the first day, or no one would want to buy, or some other weird stuff would happen that would make the opening auction glitchy and uninformative—but it was. In a sense this is a very dumb boring lesson to learn from the Slack listing: "If people want to sell stock, and other people want to buy stock, you can do a two-sided auction for the stock, like the stock exchange does every single day for every single stock, and it will come up with a price that both sides can be reasonably happy with." But that's actually a powerful lesson! One big reason that companies do traditional IPOs is that they don't entirely believe that: The wisdom and judgment and market experience of underwriting banks is required to set an IPO price that appropriately balances supply and demand; just picking the price that clears the market might, in the standard view, lead to chaos. But with barely any wisdom or judgment at all, Slack got more or less the right initial price for its shares. And its early investors were able to sell at that price. And not at, oh, say, $26. And the big private shareholders of the next company that wants to go public (and that doesn't need to raise cash for itself[3]) will look at that result and say, hey, that's pretty good. If you rely on bankers, you will probably end up pricing the deal for a rich first-day "pop," which will be nice for people who buy in the IPO but not so nice for the people who sell. If you just sell your shares in the opening auction, you'll get the market-clearing price, and it'll probably be fine. What's not to like? Efficient markets So there's a company called Grayscale Investments LLC, "a global leader in digital currency asset management," and it runs a trust called the Grayscale Ethereum Trust, which invests in the digital currency Ethereum. Think of it as sort of an exchange-traded fund for investing in Ethereum, though technically it isn't. (It's not listed on any exchange and trades over-the-counter.) If you want to get economic exposure to Ethereum without actually holding it directly, you can invest in the Grayscale trust through your broker instead. For a while the trust was private and limited to accredited investors, but Grayscale got approval to open it up to public investors, and it started trading publicly yesterday. How much would you pay for one share of a fund that owns Ethereum? I dunno, depends on how big a share is, right? Ethereum currently trades at about $290. It might be sensible to set up a trust so that one share of the trust equals one Ethereum. That would be easy to keep track of. You'd put $290 into the trust, they'd buy one Ethereum with it, you'd get back one share, your share would be worth $290. If Ethereum went up to $320, your share would be worth $320. The math is easy.[4] But it's not a law of nature, or of securities, that things have to work that way. You could have a trust where one share equals 10 Ethereum, or one-tenth. You put in $2,900, or $29, and you get back one share, and if Ethereum goes up to $320 your shares are worth $3,200, or $32. The math is a little harder, sure, but not hard, and this is all standard stuff in financial markets. One share of Alphabet Inc. costs $1,111.42, and one share of Apple Inc. costs $199.46, not because Alphabet is five times more valuable than Apple but just because ownership of Alphabet is divided a bit more finely. It is quite well understood that "one share" is a completely arbitrary division of ownership, and that if you want to know how much a share is worth you need to know both (1) how much the underlying assets are worth and (2) how much of them "one share" represents. I mean, it is mostly pretty well understood. There are glitches. You probably see where this is going. Each share of the Grayscale Ethereum Trust represents 0.09641904 Ethereum, a bit less than one-tenth. The math is harder, but you have a calculator, you can do it. At a $290 Ethereum price, a share of the trust is worth about $28. Yesterday, on its first day of trading, shares of the trust closed at, oh yeah, you know it, $300. "Fund Percent Premium: 1146.136%," Bloomberg tells me, deadpan.[5] Perhaps—almost certainly, really—the people who buy shares of the trust do so because they think it is a more convenient way to hold Ethereum than actually holding Ethereum, so perhaps there should be a premium, but not, you know, a thousand percent. No, the reason the premium is a thousand percent is pretty clearly that some people wanted to buy one share of a trust that holds Ethereum, and they automatically assumed that one share should be worth one Ethereum, and so they paid roughly the price of one Ethereum for one share of the trust. Understandable confusion! Oh well. It's not a lot of people—824 shares traded yesterday—but it's not zero people, either. And because it is not all that intensively traded (or on an exchange), no one exactly rushed in to arbitrage the price difference. You see an Ethereum trust quoted at $300, you know Ethereum is worth $290, you buy it, why not, seems reasonable. We talked on Monday about a great trick in the electric-power futures market. There are two kinds of electricity futures, off-peak and peak; peak electricity costs about $73 and off-peak costs about $29. The trick is that if you are selling off-peak futures, you can offer them at a price of like $70, and people will be like "peak power for $70? What a deal, I'll buy it!" And of course it's not peak power for $70, it's off-peak power for $70, but people have a natural tendency to assume efficiency of pricing. If the price of a thing makes it look like another thing, people will tend to believe that it's the other thing. People are worried about stock buybacks At the New Yorker, Sheelah Kolhatkar has an intellectual history of people worrying about stock buybacks, largely about economist William Lazonick, whose 2014 article "Profits Without Prosperity" "argued that the 'allocation of corporate profits to stock buybacks' deserves most of the blame for the stagnation of wage growth for the majority of Americans, the fact that well-paid jobs are increasingly scarce, and the dramatic rise in income inequality." Also plane crashes: Once one starts paying attention, it begins to seem as if buybacks are responsible for all sorts of corporate disasters. On May 31st, Lazonick co-authored an article in The American Prospect noting that, between 2013 and 2019, Boeing spent more than seventeen billion dollars on dividends (forty-two per cent of its profits) and an additional forty-three billion dollars on buybacks (a hundred and four per cent of its profits) rather than spending resources to address design flaws in some of its popular jet models, or even to develop new planes. Two of the company's 737 Max jets had high-profile crashes within the last year, and the Federal Aviation Administration recently grounded the plane over safety concerns. It is hard to read about the 737 Max situation without thinking "boy they really should have spent more money on developing new planes instead of jury-rigging the old ones." Still it seems weird to me to blame buybacks. I could just about go along with this story: - Shareholders want consistent, high and rising profits.
- The desire for quarterly profits leads companies to underinvest in expensive research projects (and generous employee benefits, etc.) that will pay off in the long term but reduce earnings in the short term.
- This dynamic leads the companies to generate a lot of extra money.
- So they give it back to the shareholders in the form of buybacks.
You could object to that story too—in theory shareholders should actually want high long-term future cash flows, and in practice they are often willing to give super high valuations to companies that never make any money but promise long-term growth—but it is plausible for some companies some of the time. But in this story the buybacks are the residual, a result of a focus on profits rather than a cause. Imagine buybacks and dividends were just outlawed. Once shareholders put money into a corporation, it could never come out. Leaving aside how weird that would be for corporate finance, what would the companies do with the money? The worrying-about-buybacks view sometimes seems to be that, if companies couldn't return profits to shareholders in the form of cash, they would care less about profits: "Meh, whatever, we can't give any money back to shareholders, so what's the point of making money, let's just pay our employees more." I don't know! I suspect that shareholders would still reward consistent rising short-term profitability, meaning that there'd still be plenty of pressure on expenses like employee compensation and research and development. The companies would still accrue lots of profits, it's just that instead of giving them back to shareholders to invest elsewhere, they'd leave them in the hands of managers to invest elsewhere: in mergers, mostly, probably, or maybe in just running a giant investment fund with the company's pile of cash. Taking control of the profits away from shareholders and giving it to corporate managers doesn't eliminate the desire for (short-term) profits, and I'm not sure it leads to any better use of the profits either. Everything is seating charts Hey this is the best management idea, every business school should teach this immediately: Hiroyuki Suzuki couldn't be happier that his company is charging him and all other employees about $100 an hour to use meeting rooms. "People really cut back on useless meetings," says Suzuki, 37, who works at chip-equipment maker Disco Corp. and is one of the company's 5,000 employees taking part in a radical experiment in business management. Yes, perfect, if you are going to impose costs on all of your co-workers (by making them go to meetings), you should be forced to internalize some of those costs (by paying for the room). If resources are scarce you should allocate them to the person who can make the best use of them and make that person pay etc. etc. etc., economics economics economics, great stuff, high fives all around. You can get carried away with that idea though. Here's the next paragraph: At Disco, everything has a price, from office desks and PCs to a spot for your wet umbrella. Teams bill each other for their work, while individuals operate as one-person startups, with daily auctions of work assignments and battles for the best ideas in the aptly named "Colosseum." Payments are settled in a virtual currency called "Will," with balances paid in yen at the end of each quarter. "We've created a free economic zone, just like what exists outside the company," says Toshio Naito, who designed the program and has continued to work on it since its implementation in 2011. "Work should be about freedom, not orders." Good lord have they never read Coase? The point of working at a company is that, like, there are pens, and desks, and a place for your umbrella, and the ability to commit to continuous work on a project for a sustained period rather than constantly shaking things up with never-ending auctions for resources and people. If it's just a bunch of by-the-day freelancers at rented desks, why have the company at all? (In fact, it's a mixed bag: "Disco's operating margin has risen to 26% from 16% since the experiment was implemented eight years ago," but "engineers have quit, complaining the approach detracts from their ability to focus purely on research," and "the relentless focus on quarterly profits can encourage short-term thinking.") I will say, though, that the idea of the company is a little bit out of fashion these days. I have written before about what I call "crypto-gig utopianism," the idea that new technologies (the internet, smart contracts, blockchain) and new social norms (no health insurance) might allow permanent large corporations to be replaced, as a form of organizing economic activity, by continuous atomized markets for everything and everyone. (In Coasean terms, if technology can reduce transaction costs to zero, then you don't need a firm.) Instead of coordinating projects and incentivizing work with bosses and salaries, you can do it with apps and cleverly designed crypto-token reward mechanisms, or something. Coordination based on trust and relationships and hierarchy is out, coordination based on markets and incentives is in. If that is our future then I guess the companies might as well get out ahead of it. MAISIE One thing that we occasionally talk about around here is dystopian science fiction about finance, and in that vein I should point you to a short story that I enjoyed called "Flash Crash," by Louis Evans. It is basically a speculative answer to the perennially popular financial-journalism question "how should you trade the end of the world," but from the perspective of a quantitative trading algorithm named Modified Arbitrage Intelligence for Stocks and International Equities, or MAISIE. Things happen At Wells Fargo, a Chance Dims to Break U.S. Banks' Glass Ceiling. Goldman Offered $241 Million to Settle 1MDB, Mahathir Says. Fintech CEO claims Facebook 'ripped off' his bank start-up's logo for cryptocurrency project. Investors Are Buying More of the U.S. Housing Market Than Ever Before. Goldman Sachs Executive Says Legacy Retail Banks Are 'Screwed.' H2O hit with more than €600m of outflows on illiquid bond worries. SEC Freezes Assets in International Manipulative Trading Scheme. N.Y. Moves to Ban Confessions of Judgment for Out-of-State Loans. Banks Spend $1 Trillion on Digital, But Few Reap the Rewards. Facebook co-founder: Libra coin would shift power into the wrong hands. Skydiving, Mountain Climbing and Other Ways Execs Terrify Their Shareholders. Alabama man says 'attack squirrel' not on meth, disputing officials' claim. "Now r/SubSimulatorGPT2 has gotten to r/totallynotrobots, which means we get to see a robot pretending to be a human pretending to be a robot pretending to be a human." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] It opened at $38.88 today, bounced around above and below the IPO price, and was at about $38.25 as of 11 a.m. [2] As I mentioned yesterday, it did trade a bit in private markets, which was informative for future trading. [3] The company itself can't raise cash in a direct listing. It can raise cash like a week later, if it wants, after establishing a trading price, which might be more efficient than an IPO. There is not really any U.S. precedent for that, but if direct listings become popular then it seems like a natural development. [4] Actually that math is too easy. The fund will have expenses, which it has to pay somehow, and it doesn't generate any income, so the most sensible way to meet the expenses—the way that Grayscale uses—is by sometimes selling some assets from the fund. But that means that over time the number of Ethereum in the fund will go down without any shareholders redeeming, and so, as Grayscale puts it, "the amount of Ethereum represented by each Share gradually decreases over time." [5] That's based on a somewhat different Ethereum price, and less rounding, than my numbers, but let's not split hairs here; on my round numbers the premium is 971%. |
⊙Ⓢ▽〖@HuLu~〗 2019 Justicia del ártico Película Completa En Línea released 2019. story: Swifty, el zorro ártico, trabaja en la sala de corre...
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