ARM, a chip design company owned by SoftBank, announced on Wednesday that its initial public offering (IPO) was priced at US$51, which is at the top of the issue price guidance range of US$47 to US$51. It will be officially listed on the Nasdaq exchange on Thursday (14th) local time, with a latest market value of approximately US$54.5 billion.
The market hopes that this year’s largest IPO will rekindle the U.S. IPO market that has been in the doldrums for two years. A number of Wall Street investment banks also hope that the IPO can lead to the recovery of investment banking business. But at the same time, technology companies, including ARM and the soon-to-be-listed online grocery delivery company instacart, as well as marketing data automation provider Klayiyo, have had to change their listing pricing strategies and seek listings at a discount. Can
The traditional IPO market has been in difficult times over the past two years. Data from Ernst & Young shows that in the first half of 2023, there were 615 IPO transactions globally, and transaction revenue fell by 36% compared with the same period last year. Based on the issuance rate in this half-year, it is expected that there will be 1,230 IPO transactions throughout the year, which will be less than about 1,400 in 2022, and almost halved from the 2,436 IPOs in 2021. The U.S. IPO market is also weak. Statistics show that so far this year, the financing scale of U.S. IPO transactions is only US$14.2 billion, a 94% drop from the record financing level in 2021.
Although it is lower than the US$64 billion valuation previously given by SoftBank, ARM is still the largest IPO in the US stock market and the world this year. Therefore, the market and Wall Street investment banks expect Arm's listing to be a catalyst for more companies to go public.
Those who most hope that ARM’s listing will revive the IPO market are undoubtedly its lead underwriters, Goldman Sachs and other Wall Street investment banks.
Wells Fargo analyst Mike Mayo said: "The IPO business is the core of Goldman Sachs' core business. The market has high expectations for ARM's listing, and this IPO is likely to meet expectations."
Due to the downturn in investment banking business, Wall Street investment banks have significantly cut bonuses and laid off employees in the past two years. According to statistics, since the end of 2022, Wall Street investment banks have laid off about 20,000 people in total.
Sharon Sheng, who had worked in investment banking on Wall Street for more than ten years, also left during this round of layoffs and switched to work in an accounting firm. She told China Business News: "The layoffs were done backwards. Although I joined investment banking relatively early, after several rounds of layoffs, it was finally my turn. The intensity of layoffs this time was comparable to that of the 2008 financial crisis."
TAGPH28 As the "leader" in the IPO business, Goldman Sachs' investment banking revenue fell by 20% year-on-year in the second quarter, a larger decline than JPMorgan Chase, Morgan Stanley and Bank of America. It dragged down the second-quarter net profit by 58% year-on-year, recording the lowest quarterly profit since the beginning of 2020.Goldman Sachs Chief Executive Officer (CEO) David Solomon said in July that the worst was over and market risk sentiment was picking up. When talking about Arm and other ongoing IPOs this week, Solomon even said: "There are some very important IPOs on the market right now, which is progress. If these IPOs go well, it will form a virtuous cycle and bring more backlogged IPOs to the market."
Jim Cooney, Bank of America's head of Americas equity capital markets Cooney also said that from now to the end of the year, 10 to 15 more companies are expected to go public. "If most of them are priced and traded well, the IPO market will recover and return to normal in the next 2 to 3 quarters."
However, many market participants believe that it is too early to predict that the IPO market will improve. For example, Sharon Sheng said that even if ARM and the upcoming Instacart are included, the U.S. IPO market will most likely not reach the historical average this year. Moreover, if ARM performs poorly after listing, it will intensify investor concerns and have a negative impact on the broader market.
In a recently released report called "Road to Next" (Road to Next), Deloitte's U.S. IPO services co-head Barrett Daniels said: "Investors will pay close attention to the progress of IPOs in September. Although market demand is picking up, the supply of companies seeking to go public is still increasing. In short, although the overall listing channel is healthy, It’s not quite ready yet”
Although ARM’s pricing is at the top of the issue price guidance range, overall, in the sluggish IPO market, companies still have to change their pricing strategies and seek listings at a discount.
PitchBook data shows that the listing valuation that Instacart is currently seeking is more than 75% lower than the valuation of its last round of financing in 2021. Klaviyo's target price is also about 13% lower than its valuation at the time of its last financing round in July 2022. In fact, even Arm's valuation is about $15 billion lower than industry insiders predicted a few weeks ago.
These “discounts” reflect the plight of technology startups’ valuations that have shrunk significantly since the boom in technology companies going public in 2021. At the time, investors poured a record $338 billion into the U.S. IPO market. However, most of the companies listed at that time broke, and Renaissance IPOETF plummeted 69% from its peak in February 2021.
While the artificial intelligence boom has revitalized technology stocks this year, buy-side investors remain cautious in valuing companies. Private equity firm Kkr & Co. According to a survey by , in order to ensure that they do not lose money, 43% of investors with assets exceeding US$10 trillion will discount their valuations by 20% to 30% compared to listed technology companies.
Josef Schuster, founder and CEO of financial services company IPOXSchuster, said: "The lower valuation reflects the investment banks' desire to be conservative in pricing to drive the stock price up on the first day, because this may pave the way for other potential IPOs."
Sharon Sheng told reporters that during the IPO boom in the past, start-ups seeking to go public would often deliberately arrange the number of tables during lunch roadshows to be smaller than the number of investors expected to attend, in order to create an "illusion" that supply exceeds demand, thereby obtaining higher estimates and valuations.
“Although this technique is simple and obvious, it works in most cases.” But now, she said, the technique has changed. "We would recommend that companies appropriately lower their valuations and reserve more shares for cornerstone investors. In this way, on the one hand, cornerstone investors buying a large number of shares can alleviate uncertainty. On the other hand, it will create a situation where circulating shares are more limited, which can attract more investors to subscribe. Moreover, lower pricing also has It is beneficial to the stock price trend on the first day of listing. "
For example, ARM set aside more than US$700 million in shares in the IPO for cornerstone investors including Intel, Apple, and NVIDIA to purchase, and successfully obtained oversubscription and pricing at the top of the pricing range.
The previously listed fast food chain CavaGroup Inc． and second-hand store SaversValueVillageInc. A similar strategy was adopted. The performance of these two stocks after listing is also among the best among the corporate stocks listed this year.