IPOs can raise cash the company needs for growing, provide an exit for private equity investors, or management can rip off the public and generate a windfall for itself.
Case in point: The IPO of Chinese microblogging site Weibo Corp. on the NASDAQ April 17. One analyst close to the company said on the condition of anonymity: “I found this astonishing, even by Chinese standards … I have never seen an IPO that’s such a blatant rip-off as this.”
The rip-off: In order to sell 2,923,478 (58 percent) of shares already held by the management before the IPO, Weibo newly issued the same number of shares to Alibaba.com Ltd. (another big Weibo investor). It then bought them back from management.
Alibaba bought the shares at a 15 percent discount to the IPO price ($14) and management got the same price. Here, the question arises why management was so desperate to unload more than half of their shares at a 15 percent discount to an already reduced IPO price. Is business really that bad? Despite the discount, the windfall for the eight-member team, of which three people also hold executive positions at SINA, still came in at $42.2 million or $5.3 million on average.
Not a bad bonus for a company that had $188 million in revenue in 2013 and lost $38 million for the year. Again, the numbers were changed multiple times and the clauses were buried in the original prospectus:
“Upon the completion of [the IPO], we plan to use the proceeds we will receive from Alibaba … to repurchase certain shares and vested options held by individuals who provided services to us.” Some people who did something. Could it be the people who were sitting on 5 million shares and wanted to cash out, a.k.a. the Weibo management?
So in order to cash out, the management needed the complex IPO construction with Alibaba and SINA. On the other hand, looking at fundamentals, neither parent company SINA nor Weibo actually needed the cash. But Charles Gao, who is chairman of Weibo and CEO of SINA could use his power to pull it off.
As of December of 2013, Weibo had $624 million in cash on the balance sheet and another $252 million in short term investments. This is double the money the IPO raised and expensive investment plans using this cash are nowhere to be found.
“If you are the management and you feel great about your business, would you sell more than half of your shares before the IPO? You only sell when you think your stock is going to do badly. That is what happened,” the analyst said.
Now the stock is up 45 percent since the IPO, so didn’t management shoot itself in the foot with this maneuver?
It turns out they prepared for this contingency as well. Twelve days before the IPO, they granted themselves share awards of 1,550,000—worth $26.4 million at the IPO price of $17—on April 4.
The only way a future investor would have found out about this bonus was to check for changes in the amended version of the IPO prospectus in SEC filings.
Apart from the 1.55 million shares they granted themselves already, management is sitting on a total number of 17.4 million options. On top, they can still award themselves 4.1 million shares under the current incentive plan.
But that’s not enough: During the course of the IPO filing, management added a provision that this number will increase by a whopping 10 percent of total shares outstanding at the end of 2014—at least 20 million shares taking the current number of shares outstanding as a base.
So including all the options and future share grants over the next couple of years, management will dilute existing shareholders by 22 percent and own 18 percent of the company. Nice work, if you can get away with it.