IPOs Get Direct

Spotify and Slack have recently gone public using a direct listing. In a direct listing, the firm arranges for its stock to be listed directly on an exchange without the help of underwriters. One downside to a direct listing for the company is that it cannot sell new shares in the listing. Now, the NYSE and NASDAQ are proposing new rules that not only would allow more companies to use a direct listing. The proposals would allow also companies to raise capital in a direct listing. Both exchanges are proposing methods to allow a company to sell new shares in a direct listing, although the mechanics have not yet been decided. Additionally, a drawback of the current direct listing process is that a company must have at least 400 shareholders who own at least 100 shares each before the listing. NASDAQ is proposing to allow a 90 period after the listing for a company to meet this requirement.

DraftKings Goes Public

Daily sports wagering company DraftKings will be going public in 2020 in an unusual way. DraftKings will complete a merger with the publicly traded blank check company Diamond Eagle. Since Diamond Eagle is already publicly traded, DraftKings will become publicly traded after the merger without having to file all of the necessary SEC paperwork associated with a traditional IPO. DraftKings will also purchase sports betting technology company SBTech for $300 million, with the financing for this acquisition from institutional investors.

Bill.com's Partial Adjustment

When Bill.com filed for it's IPO in November, the indicated price range was $16-$18. Earlier this week, the company raised the range to $19-$21, before settling on $22. When the IPO hit the market yesterday, the price jumped 61 percent. The company raised $215.6 million, but apparently left about $131 million on the table. Whether that comes back to haunt the company is yet to be seen: Sales increased about 60 percent from the previous year, but losses have also increased.

Grade Time!

As many of you are aware, it is that time of year for grades. And while we hope you earned an A, it appears that many companies haven't. The inaugural American Corporate Governance Index was released and only 16 percent of companies received an A- or better. Ten percent of companies failed. The worst average grade was a C- for Principle 8, which requires a company to regularly evaluate its system of corporate governance and commit to addressing deficiencies. The next lowest grade was given for Principle 4, which requires companies to maintain strategies focuses in long-term performance and value. Looks like more studying is needed.

TIme Value Of Money And Baseball

In case you missed it, two days ago, Steven Strasburg signed a record 7-year, $245 million contract to pitch for the Washington Nationals. One day later, Gerrit Cole signed a 9-year, $324 million contract to pitch for the New York Yankees. As we discuss in the textbook, many sports contracts are actually paid out longer than is stated. You need the time value of money to properly evaluate such contracts. For example, Bruce Sutter signed a then record 6-year, $9.1 million contract with the Atlanta Braves in 1984. While this works out to a little over $1.5 million per year, Sutter was actually paid only $750,000 per year in interest for the six years of the contract. The rest of the money was paid as a deferred annuity. Sutter last pitched in 1988, but, in 2022, he will receive his last annuity payment. Importantly, note that it was believed at the time that a one-time payment of $1.7 million would have funded the annuity.

Schwab Breaks And Buys Ameritrade

Charles Schwab is nearing a deal to buy fellow broker Ameritrade for $26 billion, a premium on Ameritrade's $22.4 billion market cap. But what makes this really interesting is that Ameritrade was valued at $25.3 billion in October before Schwab helped to drop Ameritrade's price! Schwab makes more money from commissions than Ameritrade does. When Schwab announced that it was eliminating commissions, Ameritrade was forced to follow suit. Naturally, Ameritrade's price dropped more than Schwab's, so when Schwab announced the purchase of Ameritrade, the price was much less than it would have been a month earlier before commissions were eliminated. 

TVM And Max Scherzer

The time value of money is everywhere and when you see large cash flows over many years, you need to be careful about the reported values. Consider the analysis of Max Scherzer’s contract, which was stated as having a $210 million value. Even though Scherzer would pitch for only seven years under the contract, he would receive $15 million per year for 14 years. At a 7 percent discount rate, the present value of the contract is only $131 million. A more typical contract, with the salary increasing over seven years, would result in a present value of $158 million, and an equal annual salary of $30 million would result in a present value of $162 million. That’s quite a disparity in values. And, while we agree with the calculations, we aren’t convinced that the seven percent rate being used as a proxy for the long-term return on the stock market isn’t a bit low.