Facebook’s initial public offering will grab plenty of headlines in 2012. But as Zynga’s tepid debut last week shows, multiple private investment rounds and the ability to trade shares before going public mean slim pickings when public market investors finally get their chance to own Silicon Valley’s emerging heavyweights. That is one reason the average I.P.O. this year has wound up trading about 10 percent below its offer price.
Companies like Zynga and Facebook are increasingly availing themselves of so-called D round deals. These are very late-stage investments where companies, in addition to possibly selling some new stock to finance growth, allow existing shareholders to cash out. At the same time, emerging private exchanges like SecondMarket allow qualified investors to buy stock from insiders in private firms without conducting an I.P.O.
Consider Zynga. The online game company raised money in multiple rounds at rising valuations, allowing insiders, including its chief executive, Mark Pincus, to sell along the way. While it was valued about $4 billion in early 2010, its worth on gray markets had more than tripled by early 2011. More recent signs of slowing growth meant the company fetched just a $9 billion market value when it finally went public. And when Zynga shares made their debut on Friday, they closed below their offering price.
What is odd is that private market values have historically come at discounts to public prices, generally a reflection of less liquidity and disclosure. Yet for select companies, like Facebook or Zynga, this no longer seems to apply. Investors clamor for a few hot companies — about 80 percent of trading on gray markets is concentrated among five companies — and are willing to pay up, even with little financial information available.
For the companies and entrepreneurs involved, a private market in which they fetch robust prices for their stock may be great. But it is not clear how this trend benefits capital markets more broadly, particularly if it means that by the time companies go public their most rapid growth is behind them and their valuations are already full.
Doubts on Utility Deal
Imagine if Wal-Mart wanted to buy Target and PepsiCo tried to block the deal. That is sort of what is happening, albeit on a far smaller scale, in a corner of the American electricity market. NRG Energy, one of the largest independent power producers, has filed a petition with regulators that could derail plans by $6.1 billion Northeast Utilities to buy $4.7 billion Nstar and create the dominant utility in New England.
NRG last week requested that Connecticut’s Public Utilities Regulatory Authority re-examine its right to intervene in the merger process. Earlier in the year, the state’s regulators decided it did not have jurisdiction to do so, leaving final approval to Massachusetts regulators.
That was before Hurricane Irene in August and a snowstorm before Halloween left millions of Connecticut residents, who pay the highest electricity rates in the continental United States, without power for weeks. Subsequent independent investigations revealed multiple failures on the part of Northeast Utilities’ Connecticut Light & Power unit. NRG’s filing liberally cites these findings in urging Connecticut regulators to act.
NRG’s arguments are politically savvy, in that many state legislators from each party are united in their displeasure with Northeast Utilities. The power group’s petition appears to give Gov. Dannel Malloy an opportunity belatedly to reassert his administration’s role in ensuring the interests of Connecticut residents are safeguarded as part of any merger.
Now, NRG’s interests are not necessarily aligned with those of electricity users. Going back to the Wal-Mart-buys-Target analogy, NRG appears worried — as Pepsi or other suppliers would be in that example — that an even larger customer’s market dominance would give it huge purchasing power. In Northeast Utilities-Nstar’s case, the combined company’s new heft could also enable it to generate more of its own power to compete with NRG’s facilities in New England.
If the state does decide it made a mistake in waiving its rights to intervene, there is a higher likelihood the merger will be derailed. Given the experience of Northeast Utilities’ captive customers this year, they might prefer that the company does not get even bigger, even if NRG’s motives for blocking the deal are entirely different from theirs.