Debut by ADT Fails To Impress -- WSJ
January 20 2018 - 3:02AM
Dow Jones News
By Maureen Farrell and Corrie Driebusch
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 20, 2018).
A flop of an initial public offering by ADT Inc. is the latest
black eye for Wall Street's struggling underwriting business.
ADT's shares dropped 12% Friday to close at $12.39 in their
first day of trading, capping a tumultuous two-day period for the
company and its underwriting team, led by Morgan Stanley and
Goldman Sachs Group Inc. On Thursday, the underwriters had priced
the IPO at $14, a full $4 below the middle of their target range
for the stock, the worst pricing miss for a U.S.-listed IPO that
raised at least $1 billion since 2013, according to Dealogic.
The two events show the market had much less of an appetite for
the electronic security company's stock than underwriters had
thought.
The hiccup comes as Wall Street's equity-capital-markets
business is in turmoil. The past two years were among the worst on
record for U.S. equity-capital-markets revenue when adjusted for
inflation, according to Dealogic, and an ample supply of private
capital has meant fewer companies need to tap public markets for
cash.
One of the most highly anticipated debuts of the year will be
for music-streaming company Spotify AB, which will cut underwriters
almost entirely out of the equation. Spotify is planning a rare
move to go public by listing directly, simply using three banks --
two of them being Morgan Stanley and Goldman Sachs -- as advisers
and paying them much smaller fees.
When Spotify executives have discussed their plans for listing
directly rather than having underwriters set a price range, they
have pointed to the frequency at which Wall Street banks misprice
IPOs and the challenges of getting it right, people familiar with
Spotify's listing say.
Bankers describe pricing IPOs as an art, not a science, and they
often must adjust the level shares are sold at from the initial
targeted ranges. ADT's poor performance stands out among a string
of high-profile mispricings in the past year.
"This is about the worst that an underwriter and an issuer can
do, not only to misjudge demand but to do so by such an enormous
margin," said Ambrus Kecskés, associate professor of finance at
York University in Canada's Schulich School of Business. He has
published research on direct listings and stock issuance.
In an interview Friday after the start of trading, ADT's CEO and
CFO said they were pleased with the outcome of the deal and the
underwriters' work on it.
In November, fashion startup Stitch Fix Inc. priced its shares
well below its target range and sold fewer shares than planned. One
of the worst examples of 2017 was Blue Apron Holdings Inc., which
in June sold shares in its IPO at $10 apiece after initially
seeking to sell stock between $15 and $17. Still, early declines
aren't always an indicator of long-term performance. Stitch Fix
shares are trading above their initial range.
From 2010 through 2017, 23% of companies that raised more than
$100 million priced below their initial filing range, according to
Dealogic data. Last year, of the 129 companies that met that bar,
21% priced below their initial filing range, and 10 of those closed
down on their first day of trading.
ADT's decline also stands in contrast to equity and debt markets
that have been incredibly hospitable to investors. Major U.S. stock
indexes are trading at or near records, and companies issuing debt
are able to do so at favorable terms. A market in which investors
are pouring money into stocks without worrying much about valuation
or fundamentals, coupled with historically few stock market swings,
should amount to an ideal backdrop for IPOs, many analysts say.
For ADT, the IPO was a quick turn back to public ownership after
private-equity firm Apollo Global Management LLC bought it less
than two years ago, combining it with two other security companies
it had purchased.
Many people involved in the deal were initially optimistic about
pricing ADT shares within the initial target range, according to a
person familiar with the offering. The company pitched itself as a
services company with a predictable, recurring revenue model, but
potential investors said they were concerned about its ability to
retain customers and attract new ones. Some were also turned off by
the price.
Though Apollo didn't receive as big a payout as initially
expected, on paper it still more than doubled the money it had
invested, according to a person familiar with the deal.
Write to Maureen Farrell at maureen.farrell@wsj.com and Corrie
Driebusch at corrie.driebusch@wsj.com
(END) Dow Jones Newswires
January 20, 2018 02:47 ET (07:47 GMT)
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