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Venture capital jumps the shark

July 13, 2012 1 comment

It seems that every sector of the financial industry reaches a point where hubris gets the better of them.

For investment banks, it came in 2009 with Lloyd Blankfein’s “doing God’s work” line.  Private equity is now in the crosshairs and Mitt Romney’s claims that Bain Capital created jobs is falling on deaf ears.  The latest to cross the line are venture capitalists.  Twelve years after the dot-com bust and emboldened by recent IPOs of social media companies, VCs are emerging from their bunkers and they’ve hatched some  peculiar ideas while plotting their comeback.

The Wall Street Journal had two articles yesterday on Andreesen Horowitz , the VC firm co-owned  by Marc Andreesen, tech whiz behind Netscape (remember 1994?). “We are encouraging all of our companies to put in place a dual-class share structure if and when they go public,” said Andreesen to the Journal.  “It is unsafe to go public today without a dual-class share structure,” he continues.

What?  It’s 2012, fellas!  Andreesen and his partner have been soaking too long in the Hot Tub Time Machine.  Not only do they not recognize that multiple classes of stock are routinely denounced by corporate governance experts, but they are overstepping their own expertise and role in the marketplace when they comment about how to organize long-lasting, public companies.

This anti-shareholder view is not new for Andreesen.  In a blog post from 2009, he argues that dual-class shares are OK  when “the controlling Class B shareholders have a commitment to treat Class A shareholders fairly and equally in all respects other than voting power.”  Yeah, that’s realistic.  In his list of nine factors that can work against the almighty founder-CEO’s quest to create a “long-term franchise” he lists “hedge funds aggressively short-term buying and shorting stocks for the quick pop, and often spreading malicious and untrue rumors along the way” and financial journalists who might “write all kinds of nonsense.”  ROTFLMFAO.  If a CEO can’t handle facts of business as usual like short sellers and negative press, then there is no chance for a long-term franchise!

In the other Journal article Ben Horowitz (the other half of Andreesen Horowitz) recalls encounters with an “activist investor” when he was the 35-year-old founder and CEO of Loudcloud.  “She started this campaign to force the board to remove me so we would sell the company for $10 a share. She would go to shareholder meetings, call sell-side analysts and send letters to the board,” he laments.  The journalist does not identify the investor, but one can assume this was not an institutional investor advocating for change in a programatic way.  It was some vocal individual, perhaps a smart individual, but one person all the same.  That’s the price of going public Ben.  Live with it.

In our economy, venture capital firms, investment banks, private equity firms have valuable specialist roles to play.  No one would argue that Morgan Stanley should prowl the garages in Silicon Valley to fund the next big thing.  Venture capitalists like Andreesen and Horowitz should stay in their start-up sandboxes and understand that being a public company is a privilege and with that privilege come expectations for performance and that founder-CEOs in particular need checks and balances.

Demand for social media companies, however, has resulted in several IPOs with multi-class stock and founders who retain voting control.  According to the Journal, 14% of tech IPOs in the last two years have at least two classes of stock — most notably, Facebook, LinkedIn, Groupon and Zynga.

ISS was among the many critics of Facebook’s dual class share structure, citing “retrograde government practices,” and LinkedIn has also come under fire.

Update:  Felix Salmon at Reuters also takes a look at Andreesen’s comments and notes that Andreesen “has a level of access to management and corporate information that most public shareholders can only dream of. If he likes that system, maybe he should start thinking about how to port it over to public companies, as well.”

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PR hand signals

April 23, 2011 Leave a comment

Glencore’s pending IPO has generated much speculation about how the firm will stand up to the scrutiny of life as a public company.  However, two more common names are also making headlines for their IR/PR and they demonstrate different approaches to managing reputation under the glare of the spotlight.  First up, Google.  Investors and analysts were miffed after CEO Larry Page spent only three minutes on the company’s recent earnings call and did not participate in Q&A.  Unconventional, but remember that Google is the same company that did its IPO via dutch auction and deprived Wall Street banks of millions in guaranteed fees.  Google has never given earnings guidance and its “Owner’s Manual for Google Shareholders” states that Google is “not a conventional company [and doesn’t] intend to become one.”  The challenge of IR is getting Wall Street to buy into the long-term vision, especially in times, like now for GOOG, when the short-term expectations of investors are not being met.  GOOG trades around $525, so most are trusting Page’s vision thing.  But, Therese Poletti at MarketWatch wonders if the “company still merits its unconventional stance toward Wall Street.

While Google seemingly thumbs its nose at the conventional way of doing things, Goldman Sachs is sitting on its thumbs and other fingers as it tries to convince the world that it is the kindler, gentler vampire squid.  Andrew Sorkin of the New York Times is bewildered by Goldman’s continuing spin about their mortgage market investments and hedges during the housing meltdown.  “Goldman Sachs did not take a large directional ‘bet’ against the U.S. housing market,” said Goldman last year.  For some, that doesn’t square with the fact that it was $3.8 billion short the housing market and $3.3 billion long housing market in 2007.  Sorkin says Goldman should stop tap dancing and “be proud of its prescient call about housing.  It was better for its shareholders, and frankly better for the taxpayers, that the firm was smart enough to short the mortgage market.

Goldman also downplays trading in its latest earnings news release.  In fact the word “trading” does not appear in the news release and related materials for Goldman’s Q1 earnings announced on April 19.  I repeat, no mention of trading.  CNBC points out that last year, the announcement mentioned “trading” nine times and in 2006, “trading” popped up 11 times in one quarter.  Truth is in Q1, Goldman’s equities and fixed income traders hauled in more than $2 billion in revenue.  Not bad for the business no one wants to talk about.

As it deals with media and investors and uncomfortable truths, will Glencore emulate Goldman and play by the rules but try to keep the truth obscured by sleight of hand?  Or will it follow Google and give a more decipherable, perhaps Swiss, hand gesture to those who want transparency about their business?  Hang loose, we’ll find out soon enough.

Be careful what you wish for

February 27, 2011 Leave a comment

Glencore, a Swiss commodities trading firm, is poised to announce an IPO according to an feature story by Reuters.  The IPO could yield $16 billion, valuing the little-known firm at $60 billion.  By comparison, Goldman Sachs raised $3.6 billion in its IPO in 1999, giving it a $33 billion valuation at the time.

But the potential comparisons with Goldman might not end with dollars and cents.  While Glencore, no doubt, wants permanent capital from a public listing, but is it ready for the public expectations that comewith going public?  Goldman, a private partnership like Glencore before its IPO has had a mixed record in dealing with government, media, and public scrutiny.  Now, it publishes a Code of Business Ethics, has a report from its Business Standards Committee, and a year ago hired a communications strategy firm with roots in the Bush administration.  These are things that companies are forced to do to manage expectations of diverse stakeholders, not things an investment bank with a culture of privacy elect to do.

Glencore should look to Goldman as a cautionary tale.  And it might have even more to want to keep away from prying eyes.  As a buyer, transporter, warehouser, and seller of physical commodities, Glencore operates in some of the world’s most risky and controversial areas:  Congo, Sierra Leone, Zibabwe, Kazakhstan, Zambia, Colombia, and the list goes on.

Then there’s the money.  Gelncore’s traders are paid extremely well, even by Wall Street standards.  Known for its trading prowess and keen market intelligence the firm has a reputation for shrewd dealings.  A source in the Reuters story said, “We all know Glencore never leaves any crumbs on the table.”  To boot, the company was founded by Marc Rich, who lived as a fugitive for 17 years until he was pardoned by President Clinton.  The combination must be irresistible to enterprising journalists and environmental and human rights activists.

So, is Glencore ready?  What do you think?  Here’s what the firm told Reuters in response to inquiries for the story linked above: “Glencore is a private company and our communications policy with the media reflects this status.”

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