Stop the pop
The past year brought many high-profile IPOs and with average returns on US IPOs at 80% by year-end there was no lack of hot deals. Yet Unity Software’s US$1.5bn NYSE debut in September was a first-of-its-kind and a potential game-changer.
The software company employed a so-called hybrid auction – though it isn’t really anything of the sort – as a new approach developed by Goldman Sachs to try to address tensions between Silicon Valley and Wall Street over the perceived “underpricing” of hot tech offerings.
The IPO also imposed fewer restrictions than normal on when pre-IPO shareholders could sell shares.
Unity CEO John Riccitiello and CFO Kim Jabal wanted to raise capital at an attractive valuation without the explosive pops seen on other hot tech IPOs. The hybrid auction format resulted in a higher IPO price than otherwise would have been the case.
To ensure the IPO would still result in a book of long-term investors, the company did not allocate just to the highest bidder.
“Once the company explained their goals for the transaction it became obvious to the entire management and to me that a hybrid auction was the best approach,” said Lise Buyer, the managing partner of Class V Group and an early adviser to Unity.
Unity employees were also allowed to sell up to 15% of their holdings on the first day of trading on NYSE, allowing them to sell at higher prices than if they had sold on the IPO.
Goldman’s order entry platform required investors to register bids with price and number of shares. Those orders could be amended or cancelled until books closed, but messaging from the syndicate to investors was limited to preserve the purity of the auction.
This removed the orders with no price limit specified that large institutions typically place in hot tech IPOs that leave pricing to the judgement of the banks and the company.
The Unity syndicate, which also included Credit Suisse as an active bookrunner, could show the company demand at each price point, how the quality of the book changed with pricing and daily updates on how the demand curve was changing.
“Both management and board were willing to challenge the status quo and design an offering specifically tailored to Unity’s goals,” said Matt Walsh, Credit Suisse’s head of tech ECM.
“We combined the best parts of each existing alternative to create a structure that provided the demand curve transparency of a Dutch auction or direct listing while still allowing management to choose the clearing price and their new shareholder partners.”
Unity sold 28.75m shares, including greenshoe, at US$52, above the US$44–$48 marketing range that was revised late in the bookbuild from US$34–$42 at launch.
In contrast to the 100%-plus gains seen on eight other tech IPOs in the year, Unity closed day one at US$68.35, just 31.4% above offer.
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