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Snapchat Parent Snap Valued at $24 Billion After IPO Pricing by. Corrie Driebusct and Maureen Farrell Mar 02, 2017 TOPICS: Corporate Governance, Entrepreneurs, Initial Public Offering SUMMARY: Snap, the parent of Snapchat, had a successful initial public offering (IPO). This may lead to other IPOs by technology firms in the $1 to $5 billion range There are questions about the company and its growth potential, how it can ramp up revenue per user, why it's called a camera company, its plans to fight competition and the ownership structure that gives the founders a high level of voting control. The IPO raised $3.4 billion. 120 million shares were sold to investment firms. 50 million shares went to existing investors which left only 30 million shares for all other investors The CEO and Chief Technology officer own more than 90% voting control after shares were offered with no voting rights. The restricted supply and lack of recent IPOs helped lift the price of shares. There are some concerns about Snap It spent heavily on marketing and data storage last year and lost more than $500 million. It forecast $1 billion in revenue in 2017, but it will need to quickly scale up its advertising business to support that CLASSROOM APPLICATION: The Snap IPO involves several concepts in business. Supply and demand are illustrated in pricing for the issue. The issue had 200 milion shares with only 30 million available to Corporate governance is also a concept illustrated by the IPO because the shares did not have voting rights This means the CEO and CTO have more than 90% voting control This gives the founders control, but it also means that investors do not have voting rights to elect board members and make sure their interests are represented There was strong interest in the IPO and the price increased, but uncertainty and questions remain about the company's ability to meet its 2017 revenue forecast The business model for the company depends on a key demographic in the 18-34 yearold range. those who were not investment firms or prior investors in the company QUESTIONS: Do a web search and explain what an IPO (initial public offering) is Discuss the issue of the shares and their voting rights in this IPO from the perspectives 2. of inivestors and the company's CEO and CTO 3 List the questions raised about the company as it traveled in the US and London to in over prospective investors 4. Why do entrepreneurs want to retain control of their companies? Explain why that control may not be good for the company and other shareholders? 5. Snapchat targets the 18-34 demographic Why is this age group important? End
Explanation / Answer
An IPO (Initial public offering) is a type of public offering in which shares of a firm are sold to institutional investors and retail (individual) investors. This is first time that the stock of a privately held company is offered to public. IPOs are typically issued by smaller and younger companies seeking capital to expand. Large privately owned companies will also go public to increase trading, raise funds, realise true share value and provide way to book profits for early investors.
A company can issue shares of multiple classes, which have different voting rights basis the class. In case of Snapchat IPO, public were offered nonvoting class shares. Even though they have equitable rights for profits and value, they don’t have voting rights. Thus CEO and CTO only are reserved with voting shares, who control ~90%.
There were multiple questions raised regarding the future growth plan, ambitious targets, price discovery methodology, huge costs for raising revenue, differential voting rights, user growth, and revenue from other advertising streams.
Entrepreneurs want to retain control of their companies (and thus have differential superior voting shares) to ward off any hostile takeovers. In addition, as an entrepreneur it is difficult to leave the organization to professionals and lose control. But this might not be good for other shareholders. What if founders change their interest or lose interest in the organization or technology? If there is misgovernance, what is the recourse public shareholders have? Without voting rights, minority shareholders will not be able to bring back the company to correct path.
Among the social media titans like Facebook, Twitter, Instagram, Snapchat – Snapchat is still the youngest skewed social network with more than 50% of users in the 18-34 year old. This age group heavily interested towards sharing pictures, selfies are using snapchat in big way. Thus for snapchat to grow revenue through relevant advertising and introduce technologies, this user segment will be most critical.
