Value Investing

This Is Why IPOs Are About To Become Interesting

Most of you well know that I have been calling the death of the big banks for years. They are institutions that are beyond their sell-by date. They kill you on fees and are just not a part of this new world where everyone wants to see the value before they pay a dime. Even down to everyday stuff, you are forced to pay what they demand in terms of banking charges.

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See 2017 Hedge Fund Letters.

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Having said that, times are changing. Spotify, the digital music and video streaming service, is coming to the market in an unconventional way – very similar to a Spinoff, and that’s why I like it. The non-IPO as it’s being called won’t be offering new shares to investors, it won’t be constrained by a lock-up enforced by underwriters, and it won’t be marketing its offering behind closed doors to a select few. Result? A Spinoff-type situation that is very under-covered. It’s under-covered because the big banks aren’t making any money out of it!

I’ve never been a fan of IPOs and we don’t really cover them for a variety of reasons. First and foremost is that they are engineered. The investment banks have an incentive for getting the price as high as possible to sell to the public. Did you know that banking fees are between 7-9% of the offering size? I read that Alibaba (BABA) gave up to 15% to its lead bankers of a $250m fee base, plus a $50m incentive fee! Well, you tell me. If you were a big bank, you would want those fees at all costs. Mainly at the investors’ cost. Fancy roadshows, puffing the stock up, restricting the float to certain people, lock-up periods and pure engineering aimed at getting the maximum fee. That’s not the sort of investment I like.

RIP Big Banks. You’ve milked it for too long…

Having said that, times are changing. Spotify, the digital music and video streaming service, is coming to the m arket  inan unconventional way – very similar to a Spinoff, and that’s why I like it.  The non-IPO as it’s being called won’t beoffe ring new shares to investors, it won’t be constrained by a lock-up enforced by underwriters, and it won’t bemarketing its offering behind closed doors to a select few. Result? A Spinoff-type situation that is very under-covered.It’s under-covered because the big banks aren’t making any money out of it!

Spotify not only exceeds Pandora Media, Inc. (P) in terms of global subscribers (70m vs. 5m) but also excels in th e typeof s ervice i t provides. Pandora is a radio service where a user can listen to a radio station, whereas Spotify allows a  userto search and stream songs at will, as well as offering that same radio service. In other words, Spotify is like a personalized music library, whereas Pandora is merely a radio station. Furthermore, Spotify has a much bigger musiclibrary than Pandora, thereby giving more options to the user. There are many other reasons that make this a potentialinvestment.

Lastly, if this goes well, it could open the door to al l sorts of listings in terms of new financing, unicorns and fr eevaluations without investment banks manufacturing the price. It gets me excited for the investor. It could mark a newstage in investment opportunities. I really believe it.

The Edge has an initial overview of what we think of Spotify and we’re in the process of concluding the fu ll analysis. It is being upfront about when it will publicly release its financial forecast (March 26) and begin trading on the NewYork Stock Exchange (April 3) under the symbol SPOT. Call us to find out more about SPOT and other Special
Situations coming up.

I’d love to hear from you.

Jim Osman

CEO

jo@edgecgroup.com

Article by The Edge Group